Beware the Legal Risks of Hiring Temps

    If your company is among that large number that are placing hiring on hold, it might mean that you’ll soon be hearing from managers who want to hire contingent workers to pick up spikes in year-end work flow, or temporarily fill critical but vacant positions until the economy revives. Before you start sending out requisitions to your favorite staffing agency, however, it’s worth taking a look at the legal issues HR faces in contingent hiring.

    Conventional wisdom dictates that using temporary staff, especially that provided through temporary-staffing agencies, allows companies to save on recruiting, training, and payroll costs, particularly when it comes to staffing high-turnover and seasonal job categories. But are these assumptions about the cost-effectiveness of temporary staffing justified in light of the considerable risks of legal liability attendant upon the use of temporary workers? Perhaps not.

    Recent court cases dramatically highlight the legal and financial risks of improperly classifying and treating temporary staff. In a well-publicized class-action case, a federal court approved a $97 million settlement between Microsoft Corp. and a group of so-called “permatemps” who were mischaracterized as “temporary” workers and denied valuable employee benefits and pension benefits over the course of several years. The legal damage award utterly wiped out any financial or administrative benefits that Microsoft might have realized in structuring as “temporary” its relationship with the affected employees.

    The Microsoft case shows how important it is to understand how temporary-staffing relationships are structured. This understanding is, in fact, the first key to managing legal risks. Companies typically employ two temporary-staffing models. The first involves

    directly hiring workers onto the company’s payroll and classifying them separately from regular employees. These workers are often referred to by such terms as temporary, casual, occasional, or seasonal employees. This approach helps employers create and maintain an available pool of workers to fill temporary and seasonal positions quickly, but does little to address the high cost of recruiting and training temporary workers.

    The second method involves “leasing” employees for a fee from an outside temporary-staffing agency that, in turn, handles all recruitment, training, payroll, and benefits for the temporary workers it furnishes to its client companies. These “leased” employees are typically not on the employer’s payroll and are not provided with fringe benefits such as group health insurance. Under this “leased” employee model, the costs of recruiting, training, and benefits and payroll administration are shifted to the outside agency. Both approaches have potential legal pitfalls if they’re not handled properly. Companies often overlook the risks associated with five critical issues:

    • Sexual harassment and discrimination

    • Wage and hour laws

    • The Family and Medical Leave Act

    • Labor organizing, and significant employee morale and equity issues that can sometimes give rise to it

    • Employee benefits

    Here is a refresher course on what can make temp hiring tricky, and some strategies for reducing the legal risks that HR might encounter in five significant areas.

General misconceptions
    Many workplace legal issues in temporary staffing can be traced to widely held misconceptions about who is and is not an “employee” of a given company. How many times have you heard someone say, “Well, she’s not an employee, she’s only a temp”? Such statements illustrate a myth about the status of temporary workers in the workplace. The fable is particularly prevalent when it comes to agency-supplied temporary workers, who are often recruited, trained, and paid by the temporary-staffing agency. To the unsuspecting manager or supervisor, the temporary workers are solely employees of the agency that supplied them and have no formal ties to the employer that contracts for their services. This type of thinking, though, is sure to result in legal difficulties.

The “dual employment” concept
    For purposes of most employment laws, with certain limited exceptions, employees of temporary-staffing firms working in an employer’s workplace will be considered to be employees both of the agency and of the employer. This is the so-called “dual employment” view espoused by the U.S. Equal Employment Opportunity Commission, the U.S. Department of Labor, and by many courts. Dual employers can be held jointly liable for each other’s workplace-law violations, even though they exercise little influence and no control over each other. It is a scary thought for HR unless it has thought out the legal issues in advance and taken steps to ensure compliance.

    The problems begin because many supervisors and managers mistakenly believe that temporary-staffing employees are not the company’s employees. It’s understandable. They see that an agency-provided worker is accountable to the agency, is recruited and trained by the agency, and is paid by the agency. Additionally, agreements between the agency and the employer, as well as the employer’s own written policies, usually state unequivocally that temporary staff will be considered as employees of the staffing agency only and not of the employer.

    However, the law looks beyond mere labels and focuses instead on the degree of control exercised over an individual’s day-to-day activities. And keep in mind that an employee can have more than one employer. For instance, an employee of a temporary agency working on assignment may very well be seen as an employee of both the temporary agency, which hires her and pays her wages and benefits, and the client to which she is assigned, which directs her schedule and day-to-day work activities. The greater the control exercised over an employee’s pay, benefits, work hours, and day-to-day work activities, the greater the likelihood that an employment relationship (or joint employment relationship) will be found to exist.

    The common misperceptions about the legal status of temporary staff sometimes lead to poor decision-making when it comes to workplace policies and employment laws and regulations. For instance, supervisors sometimes assume that it is appropriate to dismiss a temporary employee simply by calling up the agency and asking for someone new to be sent over, without vetting the decision through HR or giving thought to possible liability issues regarding discrimination or retaliation.

    Temporary workers are often dismissed quickly, without the same level of care and caution that managers usually exercise when dealing with traditional employees. Likewise, there is the risk that temporary staff will be subjected to sexual or racial harassment because of the mistaken idea that they are not covered by workplace laws forbidding such behavior. The danger is that companies sometimes make important personnel decisions hastily or use criteria that would never be applied to regular staff under the false assumption that temporary workers do not enjoy the same legal rights or privileges as regular staff.

    The reality is that temporary employees are covered under most of the same laws that apply to regular staff, including laws relating to wage and hour, discrimination, sexual or racial harassment, retaliation, or whistle-blowing. It’s HR’s job to increase awareness among supervisors and managers that temporary workers are entitled to the same protections against discrimination, harassment, and retaliation as are so-called “regular” staff. HR should encourage supervisors and managers to act just as prudently and carefully when dealing with temporary staff as they would with regular employees. This effort might include a review of your organization’s employee manual to ensure that, where appropriate, policies are reworded as necessary to make it clear that these laws apply to temporary employees, too.

Wage and hour compliance
    This is a particular area of concern for HR. Federal and state wage and hour laws require that nonexempt employees be paid overtime at one and one-half times their regular hourly rate for all hours worked over 40 in a single workweek. Certain employees can be considered “exempt” from these overtime requirements if their work duties are of a distinctly executive, administrative, or professional nature and if they are paid a regular salary that does not vary according to the quantity or quality of their work. However, an “exemption” can be lost if the employee spends more than 20 percent of the workweek performing nonexempt duties or if the employee is not paid a regular, fixed salary, under the so-called “20 percent rule.” Difficulties arise in situations where an employee holds two (or more) positions with the same employer, one of which is a temporary, nonexempt (hourly paid) position obtained through a temporary-staffing agency.

    Consider the following example. Jane, a claims manager, regularly works 35 hours per week as a salaried exempt employee on the payroll of a large insurance company, ABC Corporation. ABC classifies Jane’s position as exempt from federal and state overtime requirements because of the administrative nature of her duties and because it pays her a regular, fixed salary that does not vary from week to week, no matter how industrious, or unproductive, she is.

    Unbeknownst to ABC’s HR department, Jane also works 15 hours per week at another of ABC’s branch offices near her home on assignment through a temporary agency, TempCo, as a part-time evening transcriptionist. TempCo pays her on an hourly basis through its own payroll system and treats her as “nonexempt” from overtime requirements. Jane is nonexempt in her transcriptionist role both because she is paid on an hourly basis and because her typing duties do not qualify under the executive, administrative, or professional exemptions.

    Jane is performing two jobs for ABC, one directly on the ABC payroll and the other on the temp-agency payroll. This dual-employment scenario creates legal pitfalls from the failure to pay overtime, unless both employers are aware of the shared employee and properly manage the situation. For instance, wage and hour laws will likely invalidate Jane’s overtime exemption under the 20 percent rule because, taking into account both jobs, she is spending more than 20 percent of her total weekly work hours for ABC performing nonexempt duties. In addition, ABC and TempCo will likely have to aggregate all hours worked by Jane each week (35 + 15 = 50), so that 10 hours of statutory overtime pay (at time and a half) is due to Jane each week. ABC and TempCo might be held civilly liable in damages for back pay consisting of unpaid overtime, in addition to possible penalties and attorneys’ fees.

    To prevent such problems from arising, HR should have a reliable system to account for all weekly hours worked by the employee, whether on the employer’s payroll or on a temp agency’s payroll. Only with such a system can you determine with any degree of accuracy if an otherwise exempt employee continues to enjoy the exemption in any particular workweek by not performing more than 20 percent nonexempt duties in that period. If there is no exemption, or if the exemption is lost for a particular workweek, the system will be necessary to determine how many hours in the aggregate have been worked in excess of 40 for the workweek so that you can calculate and pay statutory overtime.

    Another challenge for HR is arriving at the proper regular weekly rate of pay for the employee if the two positions have different rates of pay. If, for example, an employee holds a regular full-time job at $10 per hour, and also performs services for the same employer through a temporary agency at $8 per hour, issues arise as to the proper rate of pay to use in calculating statutory overtime. Recall that overtime generally must be paid at the rate of one and one-half the employee’s regular (hourly) rate of pay. Two calculation methods are generally acceptable when two jobs at two rates are involved. One requires the averaging together of the two rates to arrive at a “blended rate.” The other uses the hourly rate of the position in which the employee is actually working at the time the overtime hours are worked. Either method, though, requires that the employer notify the employee in advance of the method to be used.

    Of course, if HR is not aware of the issue, it cannot perform the necessary calculations or notifications. HR should first create a reliable system to identify dual employed workers and arrange weekly reporting of hours worked for the temp agency. HR should then address these compliance issues in the employer’s contracts with its temporary-staffing providers. And finally, HR should regularly and clearly communicate with the temporary-staffing agency to ensure that both the company and the agency are in compliance when it comes to dual employees.     

Family and Medical Leave Act
    Another compliance area that needs HR’s attention is the Family and Medical Leave Act. The FMLA allows eligible employees to take 12 weeks of unpaid leave because of their own serious medical condition or that of a parent, spouse, or child.

    There are a number of possible issues involving the FMLA and temporary employees. First, employees are eligible to take FMLA leave only if: 1) they have worked for the employer for at least a total of one full year and 2) they have worked at least 1,250 hours for the employer in the last calendar year.

    Problems can arise when an employee moves from a temporary position on an agency’s payroll to a regular position on the employer’s payroll. Prior service for the employer through a temporary agency might be overlooked, either in calculating the one-year-of-service requirement or the 1,250-hour requirement. HR and line managers must be aware that prior service and hours worked by an individual through a temporary-staffing agency on the employer’s premises must be taken into account in determining service and hours eligibility under the FMLA.

    Other issues arise when a temporary employee takes FMLA leave while working on assignment at an employer’s work site. FMLA regulations provide that the temporary-staffing agency is primarily responsible for giving FMLA notices and granting leave to its temporary employees working at remote locations. Thus, the temporary agency is responsible for educating its employees about their FMLA rights, notifying employees in writing when leave is being counted toward the 12-week entitlement, maintaining benefits, and reinstating employees following covered leaves of absence.

    Essentially, the temporary-staffing agency is primarily responsible for administering the FMLA with all of its employees, just as the employer does for its so-called regular employees. The challenge here for the HR professional is to not assume that the agency is complying with the FMLA. Rather, the prudent HR professional will seek explicit assurances from the agency that FMLA guidelines are being followed.

    Also, employers may need to cooperate with temporary-staffing agencies to allow leave-taking temporary employees to return to an assignment following an FMLA-covered absence. That fulfills the FMLA’s requirement that an eligible employee returning from leave be reinstated to the same position or an equivalent position with equivalent pay and benefits.

Hiring procedures and background checking
    A growing number of employers conduct pre- and post-hire checks of applicant criminal history and other background information, such as exclusion/debarment lists in the health-care area. When it comes to temporary employees, HR must ensure that temporary-staffing contractors are conducting criminal or other background checks, as applicable, before sending over a temporary employee. You should verify that the agency is following the federal Fair Credit Reporting Act and any applicable state laws in conducting such checks.

    These requirements should be part of any service or vendor contract with the temporary-staffing provider. Additionally, employers must continue to ensure compliance by outside temporary-staffing firms with various other employment-related laws, such as laws and regulations relating to payroll taxes, income taxes, and immigration laws.

    You should be keenly aware of the potential for union organizing among temporary staff. Be aware of workplace sentiment on such issues as fairness and equivalent treatment, particularly between regular and temporary staff. If a union mounts a campaign and successfully organizes temporary workers, it is likely that your organization will lose much of the financial incentive it had for using them in the first place. The costs of fighting a union-organizing campaign, negotiating collective-bargaining agreements, dealing with union grievances, and possibly paying higher union wages and employee benefits are likely to erode any projected savings from using temporary workers.

    These added costs are likely to have a serious impact on the bottom line, and make it that much harder for you to maintain adequate staffing levels to meet ongoing needs and existing levels of service. HR should monitor and address morale and equity issues affecting temporary workers, as it should with all employees, to prevent unions from exploiting these issues and gaining a toehold.

Employee-benefits issues
    Frequently, employee-benefit plans exclude temporary or leased workers from coverage, and there is no inherent problem with that. Further, most plans contain a specific exclusion for leased employees. Employers should review all welfare and fringe-benefit plans to see whether they contain an explicit exclusion for leased employees, temporary employees, or employees who are not otherwise on the payroll. If it’s not there, HR should add it.

    Although an employer may affirmatively exclude leased employees from its benefit plans, there are some important caveats to bear in mind. Leased employees generally must be taken into account in performing coverage and nondiscrimination testing for qualified retirement plans. This can be a problem if there are significant groups of long-term leased employees that would otherwise be eligible to participate in the employer’s retirement plans except for their leased-employee status.

    Leased employees may also have to be included in coverage testing for certain health and welfare arrangements. Service as a leased employee generally must be taken into account in determining whether an employee is eligible to participate in the employer’s plans or was fully vested in benefits.

    As a practical matter, some or all temporary workers may have fewer than 1,000 hours and may be excluded from participation and for service-counting purposes. However, it may not be possible to rely on this 1,000-hour exclusion to the extent that a particular temporary worker’s employment status was manipulated to keep her service under the 1,000-hour level.

    For instance, some classes of temporary employees are hired directly on to an employer’s payroll and intended to work on a temporary basis, but not more than 1,000 hours in a year. In practice, some employers hire these temporary workers and let them work until they have nearly 1,000 hours of service. At this point, the employer sometimes will “transfer” the employee to the payroll of a temporary-staffing agency. This ensures that the temporary worker is continuously employed but never works more than 1,000 hours for any single employer during a year.

    This arrangement is problematic for several reasons. It leaves the employer vulnerable to fiduciary claims under the Employee Retirement Income Security Act. Section 510 of ERISA provides that it is unlawful for an employer or plan sponsor to interfere with an employee’s right to benefits under an ERISA-covered plan. The argument is that the employer’s manipulation of a temporary worker’s employment status runs afoul of Section 510 because it prevents the worker from ever becoming eligible for benefits.

    There is also a risk that the employer or the fiduciaries for the employer’s ERISA-covered plans may be liable for a breach of their fiduciary duty under ERISA for failing to cover employees under the employer’s plans, or for failing to advise employees of their rights to be covered under the plans. An employer could be required to provide retroactive benefits to affected employees, at tremendous expense, as was the case in Herman v. Time Warner, No. 98-CIV-7589 (S.D.N.Y. 1998).

    Additionally, a governmental agency, such as the IRS or the Department of Labor, could audit the employer’s employment practices and determine that some or all of its temporary or leased workers are, in fact, regular employees that should have been covered under the terms of the employer’s plans. In such a circumstance, the governmental agency would likely insist that affected employees be given retroactive benefits under the applicable plans.

    Temporary employees who work on a substantially full-time basis may also be able to sue their employers and make their own claims for benefits under the terms of the employer’s benefit plans. The success of any such claims for benefits ultimately relates to the eligibility provisions of the particular plan and the interpretation of such provisions by the reviewing committee or court. As with the leased-employee scenario described above, there is nothing inherently wrong with excluding from a benefit plan all temporary employees as a class, but the employer’s plan documents should be absolutely clear on this point. HR should review pension, health, welfare, and fringe-benefit plans to ensure that they contain appropriate exclusionary language.

    Additionally, you should make sure that all the plans contain appropriate language giving the plan administrator the necessary authority to interpret and apply the plan provisions. This language will preserve the deferential “arbitrary and capricious” standard of review that generally is afforded to plan administrators.

    If handled properly, the use of temporary workers can streamline the recruiting and hiring process and yield substantial cost-savings. HR must take care, however, to ensure that temporary-staffing arrangements comply with employment and employee-benefit law. Without the structure, the financial and administrative rewards you hoped to achieve will be swallowed in a sea of regulatory penalties and, if you’re unlucky, enormously expensive legal liability. Just ask Microsoft.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.