There has been dramatic growth in recent years in the use of temporary and leased employees. Those workers, sometimes referred to as “contingent employees” or “temporary laborers,” 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.
Definitions for temporary and leased employees
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:
- temporary employees
- leased employees
- 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 07: Independent contractors.
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.
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.
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 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.
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 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.
Employers are not required to maintain workers’ comp. for independent contractors.
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.
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 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.
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:
- it knew of the hazardous condition or failed to exercise reasonable diligence to discover the condition
- 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. 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.”
Therefore, customer and supplier employers generally become jointly responsible for satisfying all FLSA requirements including minimum wage, record keeping, and 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 FLSA under certain circumstances.
Other laws applied to non-employees 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, the Illinois Human 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 (and the IHRA). 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 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.
In most non-union settings, an employer, in regards to the at-will nature of employment in Illinois, may 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 may 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 either federal or Illinois 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. The NLRB will deem two or more entities to be joint employers under the National Labor Relations Act (NLRA) if there is proof that one entity has exercised control over essential employment terms of another entity’s employees (rather than merely having reserved the right to exercise control) and has done so directly and immediately (rather than indirectly) in a manner that is not limited and routine.
Factors considered in determining whether the customer employer enjoys sufficient “control” to be a joint employer include its involvement in:
- hiring and firing
- promotions and demotions
- establishing wages and working conditions
- daily supervision
- direction of the employees.
Each joint employer may be found liable for unfair labor practices committed not only by itself but also for any committed by the other employer, if the non-acting joint employer knew or should have known that the other employer acted unlawfully and acquiesced in that action. If there is a recognized or certified union, each joint employer has a duty to bargain under the NLRA, including a duty to bargain to impasse before deciding to replace the “joint employees” with other workers.
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 (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.
Form I-9 requirements
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.
Interns and volunteers
Employers often view volunteers and interns as a win-win for the company and the intern or volunteer. The volunteer or intern can receive a hopefully substantive work experience and the employer is able to utilize the services of an individual for free. The Department of Labor (DOL), however, likes to look deeper than simply an intern’s offer to work without pay when classifying the individual as an unpaid intern/trainee/volunteer or an employee. Like the determination between employee and independent contractor, the determination between employee and intern/trainee/volunteer requires some analysis.
The Fair Labor Standards Act (FLSA) defines the term “employ” very broadly: “suffer or permit to work.” Exempt and non-exempt individuals who are “suffered or permitted” to work must be compensated under the law for the services they perform for an employer. Internships in the “for-profit” private sector will most often be viewed as employment, unless the test described below relating to trainees is met. Interns in the “for-profit” private sector who qualify as employees rather than trainees typically must be paid at least the minimum wage and overtime compensation for hours worked over forty hours in a workweek.
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. The U.S. Department of Labor’s (DOL’s) Wage and Hour Division (WHD) also recognizes an exception for individuals who volunteer their time, freely and without anticipation of compensation, for religious, charitable, civic or humanitarian purposes to non-profit organizations. Unpaid internships in the public sector and for non-profit charitable organizations, where the intern volunteers without expectation of compensation, are generally permissible.
Qualifying as an unpaid intern
There are some circumstances under which individuals who participate in “for-profit” private sector internships or training programs may do so without compensation. The Supreme Court has held that the term “suffer or permit to work” cannot be interpreted so as to make a person whose work serves only his or her own interest an employee of another who provides aid or instruction. This may apply to interns who receive training for their own educational benefit if the training meets certain criteria. The determination of whether an internship or training program meets this exclusion depends upon all of the facts and circumstances of each such program.
In January 2018, the DOL adopted the “primary beneficiary test” to determine whether an intern or student is, in fact, an employee under the FLSA. In short, this test allows the DOL and courts to examine the “economic reality” of the intern-employer relationship to determine which party is the “primary beneficiary” of the relationship. Under the “primary beneficiary test,” the following seven factors will be used to make this determination. The extent to which:
- The intern and the employer clearly understand that there is no expectation of compensation.
- The internship provides training that would be like that which would be given in an educational environment.
- The internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
- The internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
- The internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
- The intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
- The intern and the employer understand that the internship is conducted without entitlement to a paid job when the internship concludes.
No one factor contained in this criterion is determinative and whether an intern or student is an employee under the FLSA necessarily depends on the circumstances of each case.
Educational versus operational internships
Generally, the closer an internship program is to a classroom or learning experience versus the performance of the employer’s actual operations, the more likely that the FLSA would classify the program as an internship program eligible for “unpaid” status. Employers may seek to partner with colleges and universities that assist with oversight over the programs and provide interns with college credit. Having college credit does not guarantee that the internship will meet the standards for being unpaid under the FLSA, but it can help demonstrate that it is an educational experience primarily for the benefit of the intern.
If the internship simply provides an intern with a specialized skill set to perform a specific job for that particular employer, the fact that the individual is learning new skills and may receive some benefit from the experience would not exclude the FLSA from requiring the employer to pay minimum wage and applicable overtime. Therefore, the more the internship provides the individual with skills that can be used in multiple employment settings, at various employers across the industry or several industries, the more likely the intern would be viewed as receiving training in an educational sense. In situations such as this, the intern is not performing the routine work of the employer on a regular and recurring basis and the company is not dependent upon the work of the intern.
If the intern is performing productive work in the employer’s operations, such as filing, making copies or other clerical work, helping customers, independently creating products, etc. then the fact that the intern learns some new skill is not sufficient to exclude the intern from FLSA’s minimum wage and overtime requirements of the FLSA. In this type of situation, the employer receives a direct and immediate benefit from the intern’s work and the intern is performing work that would otherwise be performed by a paid employee. As discussed previously, recent court cases have started closely examining the specific tasks performed by interns and if the tasks are the same as those being performed by paid employees with similar supervision, the courts have held that the individual is not an unpaid intern under the FLSA regulations and must be paid minimum wage and applicable overtime.
The different workforce and supervision levels
If an employer uses interns as substitutes for regular workers or to supplement its existing workforce during specific time periods, these interns should be paid at least the minimum wage for all hours worked as well as overtime compensation for hours worked over forty in a workweek. 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 have displaced a regular employee. Such interns will be viewed as employees and entitled compensation under the FLSA. However, if the employer is providing job shadowing opportunities that provide the intern an opportunity to learn certain functions under the supervision of regular employees and the intern performs no or minimal work, the activity is likely to be seen as educational experience. Keep in mind that if the intern receives the same level of supervision as the employer’s regular workforce, this suggests an employment relationship, rather than training.
The internship should be for set amount of time, established prior to the start of the internship. The employer as a trial period generally should not use further, unpaid internships 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.
Whether a person is an unpaid volunteer, or an employee depends on the specific circumstances. There are separate rules for volunteers depending upon who is providing the volunteer labor.
Volunteers in the public sector are not covered by the FLSA if all of the following criteria are met:
- the individual receives no compensation or is paid expenses, reasonable benefits or a nominal fee to perform the services for which the individual volunteered
- the services are not the same type of services which the individual is employed to perform for the public agency
- the volunteer performs the services without the promise or expectation of compensation for the services rendered.
In the private sector, no time may be volunteered to a for-profit employer. Charitable employers may accept volunteered time provided the worker performs the services with no promise, expectation or receipt of compensation for the services rendered.
In 1998, Congress expressly amended the definition of employee to exclude individuals who volunteer at food banks for humanitarian purposes, even if such individuals receive groceries from the food bank, which might otherwise be considered a form of compensation.