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, under federal and state labor and employment laws, treat contingent employees in their workplaces as though they were regular employees.
Basic definitions for temporary and leased employees
The term “contingent employment” is a catch-all phrase used to refer to all types of employment in which the employee is not a traditional or regular employee. The group making up contingent employees includes what often are called temporary employees, leased employees, loaned employees, part-time employees, seasonal employees, independent contractors, involuntarily self-employed workers and casual employees.
Many people regard temporary employees as workers of one employer who are assigned to projects of another employer that are of relatively short duration. Leased employees would commonly be regarded as workers who are assigned to projects of relatively longer duration, require greater technical expertise and that may involve relatively less direct control and supervision by the employer who is leasing the employee.
These differences are often difficult to describe conceptually. Further complicating matters, the terms are sometimes used interchangeably. Moreover, insurance companies also provide their own definitions of leased and temporary employees. In most cases, the question becomes: “who employs this individual?” The answer usually is that both the company that supplies the employee and the company that uses the employee’s services will be considered employers.
An individual hired to perform a specific task or serve a distinct function where the employer has no absolute “right to control” the manner in which the task or function is accomplished. In order to determine whether an individual is an “employee,” or an “independent contractor” the following factors are considered:
- the right to control the conduct of the work
- the freedom to select and hire helpers
- the furnishings of tools and equipment
- self-scheduling of working hours
- the freedom to offer services to other entities.
The Internal Revenue Code (IRC) contains the following definition of “leased employee.” The term “leased employee” means any person who is not an employee of the recipient who provides services to the recipient if:
- such services are provided in regard to an agreement between the recipient and any other person (in this subsection referred to as the “leasing organization”)
- such person has performed such services for the recipient (or for the recipient and related persons) on a substantially full-time basis for a period of at least one year
- such services are of a type historically performed, in the business field of the recipient, by employees.
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 following terms:
- Client company - A client company is an individual or entity that has contracted with an employee leasing company to supply the services defined below.
- Employee leasing company - An employee leasing company is a company that, in a majority of its contractual relationships, for a fee places the employees of a client company onto its payroll and leases said employees to the client company on an ongoing basis, as agreed to by the client and employee leasing company and that meets the following tests:
- Employment responsibilities are shared by the employee leasing company and the client company.
- 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:
- 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:
- 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.
Temporary help services
Employee leasing shall not include “temporary help services.”
- Temporary help service - A service where an organization hires its own employees and assigns them to clients to support or supplement the client’s workforce in work situations such as employee absences, temporary skill shortages, seasonal workloads and special assignments and projects.
- Temporary employee - Any individual hired to perform such temporary help services.
Employee leasing shall not include other independent contractor services, such as security services, job shop companies, strike-breaker replacements or any other service that does not perform the functions defined previously.
Definitions used in this topic
For purposes of this topic 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,” and the worker will be referred to as a “temporary employee.”
Workers’ compensation coverage
Workers’ compensation coverage is not regulated under federal law. However, many states do have regulations providing general immunity from liability that protect employers as to workplace injuries and illnesses, which generally also applies with regard to temporary employees working for customer employers.
Safety and health laws
The federal Occupational Safety and Health Act (OSH Act) applies to employers engaged in interstate commerce who employ even a single employee (see Safety and health). The law requires employers to:
- make sure they are not maintaining any working condition or practice that presents a “recognized hazard” or that presents a danger “causing or likely to cause death or serious physical harm”
- comply with all applicable standards and regulations (of which there are thousands, including the hazard communication standard, fall protection, bloodborne pathogens standard, etc.).
Generally, all employees are afforded the same protections and must comply with the same safety precautions under the OSH Act. In determining whether a customer employer is responsible under the OSH Act for the temporary employees who are assigned to it, the following questions apply:
- whether the customer employer has the power to control and direct the temporary employee’s activities in its workplace
- whether the customer employer has the power to fire or modify the temporary employee’s conditions of employment
- whether the customer employer pays the temporary employee’s wages
- whether the temporary employee considers the customer employer to be their employer.
While no one question is determinative, affirmative answers point to customer employer responsibility under OSHA. In a case where the customer employer is considered liable and is cited, the supplier employer may also be cited.
At a multi-employer worksite where a number of employers created or controlled the hazard(s), The Occupation Safety and Health Administration (OSHA) regulators also may issue citations to other employers, including the general contractor. An employer who creates a hazard is liable for the danger presented to either that employer’s employees or the employees of another employer.
There are cases where OSHA may regard a supplier employer as not responsible for OSHA citations.
Example - In a case where safety violations at a customer employer’s worksite led to the death of a temporary employee assigned there, the agency ruled that the supplier employer, even though it had the power to hire and fire, could not be cited because it was not responsible for creating the hazard or supervising the workers.
Customer employers must maintain certain records regarding temporary employees. Employers are required to maintain records of injuries and illnesses of employees. OSHA’s policy is to extend this requirement to customer employers to the extent that they direct and control temporary employees’ work activities. While it is possible that a customer employer may, as a matter of contract or agreement, require the supplier employer to maintain these records on its behalf, even under such circumstances the customer employer should also keep its own separate records regarding temporary employees.
Wage and hour requirements
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 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 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.”
Thus, customer and supplier employers generally become jointly responsible for satisfying all FLSA requirements including minimum wage, record keeping and (if the temporary employee works more than 40 hours in a week for the customer employer) overtime obligations.
Finally, while temporary employees are covered by the FLSA, the exceptions applicable to regular employees also apply to temporary employees. Thus, temporary executive, administrative and professional employees are exempt from FLSA’s requirements. In addition, workers in certain agricultural and service industries may not be protected by the law under certain circumstances.
Other employment laws
Title VII and other anti-discrimination laws
Courts have broadly interpreted the coverage of anti-discrimination laws, such as Title VII of the Civil Rights Act (Title VII) and the Age Discrimination in Employment Act, 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 to temporary employees for their discriminatory acts toward them. See Discrimination.
In determining whether a customer employer in a particular case can be subject to liability for acts that discriminate against temporary employees, courts will consider the degree of the customer employer’s supervision of the temporary employee’s daily activities and whether the customer employer has the authority to impose work rules, to determine the opportunity for and conditions of employment and work assignments and to issue operating instructions.
In a variety of cases, courts and agencies have found that customer employers are subject to liability. Courts have indicated that a customer employer can, under circumstances where it shares supervision and control with the supplier employer, be jointly liable in connection with the unlawful actions of the supplier even if the customer employer disagreed with or had no knowledge of those actions.
Americans with Disabilities Act
While many of the considerations discussed previously apply equally with respect to the Americans with Disabilities Act (ADA), there are additional considerations under the ADA. See Disabilities and reasonable accommodations. Specifically, the duty to reasonably accommodate qualified individuals with a disability affects both supplier and customer employers.
Supplier employers must, where appropriate, make reasonable accommodations to qualified temporary employees with disabilities so as 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. The conservative approach is for a customer employer to offer a reasonable accommodation to a qualified temporary employee with a disability who needs an accommodation and who, with accommodation, could perform the essential functions of the job.
Family and Medical Leave Act
Under the federal Family and Medical Leave Act (FMLA), separate companies or businesses may, under some circumstances, be treated as joint employers. Where the customer employer has sufficient control over the work or working conditions of the temporary employee (taking into account, among other things, the nature and degree of control, degree of supervision, power to determine pay rates and involvement in payroll functions and the direct or indirect right to modify the employment conditions of the workers), a joint employment relationship exists and both the supplier and the customer must count the temporary employee to determine whether each respective employer is covered under the FMLA and whether an employee is eligible for benefits.
The primary employer (normally the supplier employer) is the only one 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.
In most non-union settings, an employer, in regard to the at-will nature of employment in most states, 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 statute or retaliate against an employee for exercising a right protected by law.
Temporary employees and unions/labor relations coverage
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 overturns the standard articulated in the Board’s 2015 Browning-Ferris decision and returns 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. The final rule will go into effect on April 27, 2020.
Under the current Browning-Ferris standard, two or more entities are considered joint employers if they are both employers within the meaning of the common law, and if they share or co-determine those matters governing the essential terms and conditions of employment. Notably, the Board considers whether an entity exercises control over terms and conditions of employment indirectly or whether it has reserved the authority to exercise such control, even if it never actually does. The controversial Browning-Ferris decision overruled 30 years of precedent with respect to the joint employer standard.
Under the final rule, an entity will be 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.
Defamation claims and employment references
Both customer employers and temporary help agencies can, potentially, be liable for defaming a temporary or leased employee.
Most employers follow a neutral reference policy whereby they only disclose or confirm dates of employment and positions held, but do not provide details about an employee’s job performance or any information about the circumstances surround the termination.
Employers, of course, 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, Internal Revenue Code defines “employer” as “the person who pays [the] 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.
Although no employer is legally required to provide benefit plans to its employees, the Employee Retirement Income Security Act (ERISA) governs employee benefit plans if they exist. The Microsoft cases from the Ninth Circuit U.S. Court of Appeals demonstrate why plan administrators should be careful about denying ERISA benefits to temporary employees. If a qualified benefit plan provides benefits to all employees, as did the Microsoft plan, 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.
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. IRCA regulations make it clear that customer employers using contract services generally do not have an obligation to verify the employment status of the temporary employees assigned to it. See Immigration.
An intern is generally a student or trainee who works to gain practical experience in a certain profession or occupation. Interns may or may not be considered “employees” for compensation purposes, depending on the work they do for the company. When hiring an intern for the company, seek out an individual who is driven, willing to learn and a good fit for the culture of the office. Interns should be involved for the educational experience; otherwise, they may be considered an employee.
Payment of wages
Federal law requires that every employee be paid at least the minimum wage for every hour worked and overtime for hours worked in excess of 40 hours per workweek unless a specific exclusion applies. The Fair Labor Standards Act (FLSA) defines “employment” as “to suffer (require) or permit (allow) to work.” Those terms have been interpreted broadly to cover as many workers as possible. Therefore, if work is required or even allowed, the employer is obligated to pay.
However, there are certain individuals for whom the employer can claim an exemption from the requirements of the FLSA such as interns or trainees. The employer bears the burden of proof in classifying workers’ positions in order to properly claim an exemption. In order to determine if an internship or training program can be claimed as an exemption from the requirements of the FLSA, all of the facts and circumstances must be analyzed.
DOL guidance on classification
The DOL has provided guidance for internship to assist employers in identifying when interns should be treated as employees. Since employees are entitled to FLSA protections and interns are not, this is an important analysis. The DOL established a “primary beneficiary test” that lists seven factors to determine whether the party primarily benefiting from the arrangement is the intern or the employer:
- The extent to which the intern and the employer understand that there is no expectation of compensation. Promises of payment, express or implied, suggest employment.
- The extent to which the internship provides training that is similar to that offered in an educational setting, such as clinical or hands-on training by schools.
- The extent to which the internship is affiliated or connected to the intern’s education program by coursework or academic credit.
- The extent to which the internship corresponds to the academic calendar and commitments.
- The extent to which the duration is limited to a period that provides beneficial learning.
- The extent to which the intern’s work complements, rather than displaces, the work performed by paid employees and provide substantial educational benefits.
- The extent to which the intern and the employer understand that the internship does not create a permanent job entitlement at the end of the internship.
With these considerations in mind, employers should document the terms of the internship and provide sufficient detail to ensure that expectations are consistent. If all of the factors listed previously are met, an employment relationship does not exist under the FLSA and the employer can claim an exemption from the requirements of the FLSA.
How the type of work impacts the intern’s status
If interns are not getting paid, they are not allowed to do substantive work. In other words, they cannot do work that an actual employee would be paid to complete. That includes work that inures to the benefit of the company. The seven criteria for being an unpaid intern are listed above. Keep in mind that if interns generate productive work for the employer, they would likely fall under FLSA’s minimum wage and overtime requirements regardless of whether the intern is receiving benefits in the form of a new skill or improved work habits. Employers should consider whether the primary purpose of utilizing an unpaid intern is for work purposes or for the educational benefit of the intern.
The EEOC has provided guidance through an informal discussion letter:
For unpaid or volunteer interns, coverage as an employee under EEOC-enforced laws likely will turn on whether the intern receives “significant remuneration” in some form, such as a pension, group life insurance, workers’ compensation or access to professional certifications. Further, these benefits need not be provided by the employer – benefits from a third party as a consequence of the volunteer service will still qualify. So, if an educational institution provides significant benefits to an unpaid intern for her volunteer work with an outside employer, she may qualify as an employee of that employer.
By contrast, an intern who receives only some small benefit that is an “inconsequential incident of an otherwise gratuitous relationship” will not be an employee. Benefits that courts have not deemed to be significant include academic credit, practical experience and scholarly research. Nonetheless, even where no significant remuneration exists, unpaid interns may be considered employees if the volunteer work is required for regular employment or regularly leads to paid employment with the same employment institution. Similarly, an applicant to or a participant in, a training or apprenticeship program is protected against discrimination with respect to admission to or participation in, the training or apprenticeship program, regardless of whether the individual is an “employee.”
How employers should handle interns
Because all seven factors listed previously must be met in order to claim an exemption, the prudent course of action for employers would be to pay most interns. Additionally, an employer choosing to offer unpaid internships should take care to structure the internship in such a way to ensure that the intern is the one who will receive the primary benefit of the work experience. Unpaid internships should focus on exposing the intern to a particular career field and offering a mentoring experience. The focus should not be on production – interns are not to be used as a free source of labor. A clear understanding with the intern is a must. The nature of the relationship with an unpaid intern should also be documented.
The best practices if an employer wishes to utilize an unpaid intern
First, companies should specify to interns at the very beginning whether they will be paid. It would be best to have a written agreement signed by both the company and each intern setting forth these expectations. Next, if interns are unpaid, make sure to comply with the six-point test under the FLSA. Emphasize the educational and training aspects of the internship program and make sure the company is not deriving an immediate advantage from any work being produced by the unpaid intern. For all other internships, try to have guidelines for the internship program so the whole wheel doesn’t have to be reinvented every time a new intern is hired.
For an unpaid volunteer, the employer must establish that the worker is properly classified as a “trainee” as opposed to an “employee.” The FLSA makes a special exception under certain circumstances for individuals who volunteer to perform services for a state or local government agency and for individuals who volunteer for humanitarian purposes for private non-profit food banks. An exception is also recognized for individuals who volunteer their time, freely and without anticipation of compensation for religious, charitable, civic or humanitarian purposes to non-profit organizations.