Battles Wax and Wane in the ‘Permatemp’ Wars

By Ed Frauenheim

Oct. 12, 2005

J ennifer Miller was about as permanent a temp as you can be.

    For 10 years, the Boise, Idaho, resident worked continuously at computer maker Hewlett-Packard but got her paycheck from a different employer. She was laid off from staffing firm Manpower in March, and is now the lead plaintiff in a class-action lawsuit accusing HP of unfairly excluding workers like her from benefits including vacation and holidays. The suit seeks more than $300 million in damages.

    “They would treat us as employees,” Miller says, “but not give us the same benefits.”

    An HP spokeswoman says Miller’s suit and a related suit by an alleged whistle-blower “have no merit.”

    The HP suits are among the latest examples of what’s been dubbed “permatemp” litigation. It’s a topic made famous by software giant Microsoft, which agreed to pay $97 million five years ago to settle the claims of workers given labels such as “temporary” employees, “freelancers” and “independent contractors.”

    Whether companies are shortchanging staffing-firm temps and contractors through long-term gigs remains controversial. And workers recently have brought a slew of lawsuits against a division of package delivery giant FedEx. Overall, though, it seems employers are steering clear of legal troubles related to permatemps. When it comes to staying within the letter of the law, some observers say, employers have wised up about how to set up their benefit plans and use contingent workers.

    The number of permatemp suits seems to have decreased over the past several years, says Johnny Taylor, chairman of the Society for Human Resource Management and senior vice president of human resources for financial services firm In the 1990s, some companies lowered their headcount, taxes and benefit expenses by calling workers independent contractors in what amounted to a “sham,” Taylor says.

    But companies these days are taking steps to define workers properly and set clear rules, such as no longer giving phone lines to contractors. “In 2000, most companies did a gut check to make sure they were compliant” with the law, Taylor says.

Practice widespread
The term “permatemp” refers to people working for extended periods in a range of situations, such as through a staffing firm or as an independent contractor. The Center for a Changing Workforce estimates that there are at least 3 million permatemps in the workforce. Critics charge that these workers often are paid lower wages and receive fewer benefits while performing the same jobs as regular employees.

    Ed Lenz, general counsel for the American Staffing Association, argues that problems associated with permatemps have been blown out of proportion. He cites a study from the Employment Policy Foundation think tank several years ago that found that most temp workers who had been in their current assignments for two or more years preferred their status.

    It is against federal law, Lenz says, to shift workers to a staffing firm payroll simply to avoid having to pay them retirement benefits that vest over time. But most employers do not turn to staffing firms to save a buck, he says. “They’re used primarily for labor force flexibility,” he says.

    Perhaps, but a number of permatemps have sued, claiming they’ve been misclassified and deprived of benefits.

    Jennifer Miller’s case against HP has an intriguing twist. A separate suit filed earlier this year by a longtime HP employee alleges that company managers were directed to shred their notes after a meeting in which it became apparent that HP was violating employment law.

    The purpose of the October 2003 meeting, according to the suit, was to learn from an HP attorney how to legally classify workers as contractors rather than employees. But as the attorney reviewed Microsoft’s permatemp case, “it was apparent to those assembled that HP was violating the law in a manner that was virtually identical to the Microsoft case,” the suit says.

    HP representative Brigida Bergkamp says the company’s legal team abides by the profession’s rules of responsibility and HP’s standards of business conduct.

    Microsoft’s famed permatemp case hinged on the fact that the software giant didn’t explicitly bar its staffing-agency and casual workers—temps employed by Microsoft—from its employee stock-purchase plan, says one attorney whose firm has represented Microsoft. That allowed longtime temps to make the case that as “common law” employees, they were entitled to the same benefit, he says.

    Whether a worker is a common-law employee may not be easy to assess. An Internal Revenue Service publication related to employment taxes tries to put the matter succinctly: “Under common-law rules, anyone who performs services for you is your employee if you have the right to control what will be done and how it will be done.”

    Yet the same publication indicates there is no simple test for figuring out whether someone is an independent contractor or an employee: “In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered.”

    On the other hand, companies may have found an unambiguous solution to the problem of permatemps and benefit plans. In the wake of the Microsoft settlement, employment attorneys say, companies have rewritten benefit plans explicitly to include only regular employees.

A solution for Verizon
    Such a plan seems to have made a difference for Verizon Communications in a court battle with staffing-firm employees who claimed that the phone giant wrongly denied them benefits. In August, a federal appeals court upheld a ruling against the employees, noting that the benefit plans in question specifically exclude employees not “paid directly” by the company.

    In defending itself against Jennifer Miller’s lawsuit, HP may be able to rely on a similar argument. HP’s U.S. benefits policy “is that benefits are provided only to eligible active HP employees in the U.S. who are on the HP payroll and who are regularly scheduled to work 20 or more hours a week,” Bergkamp says.

    Attorney Judith Bendich of Bendich, Stobaugh and Strong, the Seattle-based law firm that led the suit against Microsoft, wishes that the federal Employee Retirement Income and Security Act were much tougher on employers when it comes to requiring equal distribution of benefits to common-law employees. Federal legislation sponsored by Democrats to revise ERISA along these lines has stalled in recent years. Permatemp cases against government bodies, like a suit Bendich’s firm is leading against the city of Seattle, are more promising because public agencies aren’t governed by ERISA but may be subject to other rules, she argues.

    A factor that may be limiting new permatemp lawsuits is their long duration. The Microsoft case took almost 10 years before it reached a settlement, and only in September did the court approve distribution of most of the money. “There are very few attorneys that have the resources to go after cases like this,” says David West, executive director of the Center for a Changing Workforce.

Drivers cry foul
One employment lawsuit in which plaintiffs’ attorneys recently prevailed is a class action against a unit of FedEx. A group of drivers for FedEx Ground, the company’s division focused on overland shipping, claimed they were employees rather than independent contractors and should be reimbursed for business expenses such as the trucks they furnished and FedEx uniforms they wore. Last year, a California trial court judge ruled that drivers who operate a single route for FedEx Ground were in fact employees. FedEx Ground “not only has the right to control, but has close to absolute actual control over” the drivers, the judge wrote in his opinion.

    The damages phase of the case is not complete, but the initial ruling seems to have triggered a host of related suits against FedEx. In the past year, roughly 30 suits have been filed by drivers around the country, says FedEx Ground spokesman David Westrick.

    Westrick says the company intends to appeal the California judge’s decision, and that FedEx Ground’s treatment of drivers as independent contractors has survived the review of various state and federal agencies, including the IRS. “We are protecting the business model and the livelihoods of 14,000 contract drivers around the country,” he says.

    FedEx isn’t the only company in the shipping field to face worker-status litigation. In September, a group of drivers sued freight transport company EGL, alleging that it misclassified them as independent contractors. The suit, filed in a California Superior Court, seeks damages including business expenses and, for a subclass of the drivers, unpaid overtime. EGL’s legal department did not return requests for comment.

    Lorrie Grindstaff, an attorney representing plaintiffs in both the initial FedEx Ground case and the EGL case, says she sees more companies mislabeling employees as independent contractors, which ultimately strains government coffers when workers get hurt or lose their jobs and turn to public agencies for help. “Not only are employees subsidizing the employer, so is the taxpayer,” she says.

    Ultimately, the issue isn’t about the employer of record but how the U.S. promotes decent benefits for workers, suggests American Staffing Association attorney Lenz. We are moving toward a “freelance nation” without appropriate public policies, he says.

    “The problem is with the whole model,” Lenz says. “It’s not just with temp workers; it’s with the traditional employer-based benefit system.”

Workforce Management, October 24, 2005, p. 53-55Subscribe Now!

Ed Frauenheim is a former Associate Editorial Director at Human Capital Media and currently works as Senior Director of Content at Great Place to Work. He is a co-author of A Great Place to Work For All.

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