Are Time Limits the Answer to Liability

The Microsoft “retroactive benefits” lawsuit and similar cases have companies worried about their potential liability for employees assigned to them by staffing firms. Many are asking, “How long can I use your employees before I become an employer?” Some impose time limits on temporary assignments. But time limits may not be the answer to companies’ liability concerns.

There are no black-and-white answers when it comes to determining who’s an employer. Length of service is never the sole issue. It’s one of many factors in a test often referred to as the common-law “control” test. (For a list of the factors making up this test, see American Staffing Association Co-employment Handbook.) To complicate matters, different versions of this test are used depending on what area of the law is involved.

Because this test is complicated, companies are looking for a foolproof way to avoid getting into disputes over whether they are employers. Many think placing a “bright line” limit on assignments is the best way to avoid liability.

However, such limits may protect companies from benefits liability, but not from other types of liability—for example, for violating EEO laws. Moreover, “churning” workers is an inefficient way to use temporary help and doesn’t work for organizations needing long-term staffing assistance.

Fortunately, there are practical alternatives that will serve companies better than cutting back on their use of temporary help or placing arbitrary time limits on worker assignments.

Benefits
Microsoft got off on the wrong foot by classifying the workers in question as “independent contractors.” After the IRS reclassified them as employees, Microsoft tried to fix the problem by placing them on the payroll of staffing firms. The 9th Circuit Court of Appeals held that this didn’t change their status as Microsoft employees for benefits purposes. To make matters worse, Microsoft conceded in court that the workers were their employees. On these atypical facts, the court ruled that Microsoft must pay benefits.

Limiting Contacts With Workers
Companies should be able to avoid Microsoft’s fate if they limit their contacts with the assigned employees to the extent necessary to ensure that the job gets done and leave just about everything else to the staffing firm so it can fulfill its role as employer.

For example, organizations should avoid recruiting, making wage and benefit decisions and providing worker training (other than site-specific safety training). Likewise, workplace complaints and injuries regarding assigned employees should be promptly reported to the staffing firm for action.

A recent federal district court decision in California (Burrey vs. Pacific Gas & Electric, May 12, 1999) recognized substantial employer responsibilities of the staffing firm and held that it, not the company, was the employer for benefits purposes despite the company’s day-to-day involvement with the workers.

Time Limits
HR can impose time limits if they have concerns that the assigned employees may be considered their common-law employees despite efforts to minimize contacts. ERISA allows employers to write their retirement and 401(k) plans to expressly exclude employees who work less than 1,000 hours in a year.

Companies whose plans contain such a provision can exclude staffing firm employees by holding assignments under 1,000 hours. But there is an alternative to time limits that avoids disrupting the worker’s assignment and the company’s operations.

Companies shouldn’t have to resort to limiting temporary assignments to avoid benefits liability. Courts, including the 9th Circuit itself, have held that employers can exclude employees from their retirement and 401(k) plans for reasons other than failure to meet the 1,000-hour service test as long as they use clear exclusionary language. Employee waivers that are supported by the company’s plan documents may provide added protection. It’s important to consult expert benefits counsel regarding proper plan language and the terms of any employee waiver agreements.

Tax Issues
While organizations aren’t legally required to provide benefits to staffing-firm employees, there may be adverse consequences for the company’s plan if they’re excluded.

Federal tax law prohibits discrimination in favor of highly paid employees. So failure to provide benefits to staffing-firm employees working more than 1,000 hours in a year (and who are considered to be the company’s common-law employees) could cause discrimination problems, depending on how many covered, highly paid employees they have relative to covered lower-paid employees. Even if assigned employees aren’t their common-law employees, discrimination problems could arise under the so-called “leased employee” rules if workers perform services for the company during more than 1,500 hours in a year.

Tax issues are of particular concern in the case of employee stock-option plans qualified under section 423 of the Internal Revenue Code (not all stock-option plans are qualified under this provision). Unlike the discrimination rules applicable to retirement plans, the rules for these stock-option plans require (with limited exceptions, e.g., for shorter-service employees) that all employees be covered in order for the plan to receive favorable tax treatment, not just a specified percentage. Again, these issues should be discussed with counsel.

Non-Benefits Areas
Companies have long been considered to have co-employer obligations to staffing-firm employees in non-benefits areas. Civil rights, workplace safety and collective bargaining are a few examples.

In non-benefits areas, limiting assignments to a specified time period won’t necessarily protect the company from liability. In some cases, it’s possible that a company could be considered to be an employer from day one. This hasn’t been a big concern to organizations since the staffing firm takes care of obligations such as paying the workers’ wages. A company can protect itself in other areas, such as civil rights and workplace safety, by putting procedures and safeguards in place to minimize liability.

Time limits aren’t the solution.
Time limits don’t provide blanket protection under most labor and employment laws such as EEO and wage and hour. While time limits may avoid liability in the benefits area, it isn’t a good solution for businesses that need long-term staffing help. By carefully managing staffing to minimize contacts with staffing-firm employees, coupled with properly drafted benefit plans and employee waivers, companies should be able to limit their liability in the benefits area as effectively as they have in other areas of the law.