By Eric Rumbaugh
Jan. 5, 2010
A persistent hot topic regarding contingent labor is that of term limits. The phrase “term limit” typically refers to a policy pursuant to which contingent workers are engaged for a finite period of time and must leave at the end of that time.
While term limits are pervasive, confusion persists about what value they really add to the companies that use them. In this article, I discuss the costs and benefits of term limits and explain some common misconceptions about them.
Benefits and costs
A chief benefit of term limits is that they force a decision. Businesses employing term limits often comment that they are concerned that a contingent worker can remain in a position indefinitely where a directly hired employee might have been released, simply because normal HR practices may not be in place. Term limits, these businesses maintain, force them to evaluate the skills and overall fit of a contingent worker at some specific point in time—and presumably decide whether to directly hire the worker or let him or her go.
Another benefit of the term limits is psychological. Some businesses are uncomfortable having long-term contingent staff working alongside their regular employees, usually with different pay, benefits and promotional opportunities. Some businesses perceive morale challenges for the long-term contingent workers, their directly hired colleagues, or both.
The most often mentioned benefit of term limits, however, is legal. Many businesses believe that they obtain some legal protection from enforcing term limits. The extent to which this belief is valid is discussed later.
The most obvious cost of term limits is increased turnover. Every personnel transaction (bringing someone in or letting someone go) has costs, including administrative/transactional costs, and litigation threats. Perhaps the most significant cost presented by term limits is loss of skill and experience.
Often, businesses employing term limits face internal pushback from business units that are loath to lose talent that is already trained, experienced and productive, especially if it will be followed by bringing on someone who must be trained because he or she is new to the job.
Term limits adopted to avoid co-employment status have little benefit, and may have an added cost if it gives the business a false sense of security. The concept of co-employment refers to situations in which a worker is simultaneously treated as an employee of two or more entities.
The various federal agencies tasked with administering employment laws have their own means to determine co-employment as it pertains to the laws they enforce. How long someone has been engaged, while occasionally relevant, is almost never very important in deciding whether co-employment exists in a particular case.
A key issue in co-employment is coverage under civil rights laws. The U.S. Equal Employment Opportunity Commission is the federal agency that investigates most discrimination claims.
In 1997, the EEOC issued enforcement guidance in which it asserts that, in the great majority of circumstances, staffing firm workers are employees within the meaning of the federal employment discrimination laws. The EEOC lists multiple factors for determining whether co-employment exists with regard to discrimination protection. Duration of an assignment is not listed as a factor at all.
Consider the topic of sexual harassment. Is it unlawful to sexually harass a temporary clerical worker? Yes. If the worker is in the building for one day or two years, would the answer change? In almost all cases, no, the answer would not change regardless of assignment length.
The Department of Labor administers the Family and Medical Leave Act. Under that law, the DOL usually presumes co-employment in the case of contingent workers: “Joint employment will ordinarily be found to exist when a temporary placement agency supplies employees to a second employer.”
The DOL also administers the Fair Labor Standards Act, the federal law covering wages and overtime. The DOL takes the position that businesses are joint employers of a person unless they are “completely disassociated” with respect to employment of that person. In most situations, both the supplier and the end-user of contingent labor are jointly liable for FLSA violations.
For workers’ compensation purposes, contingent workers are typically considered employees of the staffing supplier as well as the host company, regardless of assignment length. In short, in most contingent labor situations, co-employment exists immediately, and term limits have no effect.
Independent contractor classifications
There is no one test to determine independent contractor classification status—there is an Internal Revenue Service test, a National Labor Relations Board test, a workers’ compensation test (which varies from state to state) and many others. Whether term limits are involved is not likely to be critical regarding independent contractor classification, but could be a factor in a close case.
Superficially, independent contractor status boils down to whether a business has the right to control the means and manner of the work of the individual in question. Perhaps a more accurate question is whether the putative independent contractor can really be said to be in business.
Does the person make decisions that really affect profit and loss? A court will assess all aspects of the relationship between a business and a worker to determine whether the individual is an independent contractor.
When businesses talk about co-employment, their real underlying concern is often employee benefits. Businesses typically don’t provide benefits to contingent workers, but in some cases, courts have determined that they should have been doing so. Term limits have been offered as a tool for businesses trying to prevent unplanned coverage of contingent workers.
Term limits can have some use in fighting unplanned benefits liability. For example, under IRS guidelines, if an employee works less than 1,000 hours in a year, the employee generally may be excluded from participation in and benefit accrual under a qualified retirement plan.
If, however, an employee works more than 1,000 hours in a year, the employee generally must be included in the plan. So, for retirement plan purposes, imposing a 1,000-hour limit on contingent workers could be effective. This 1,000-hour rule does not apply to health/welfare plans, however.
In many cases, however, businesses can control benefits risk through simple plan review and modification. The first rule of benefits law is that, in most cases, the plan terms govern.
Each qualified benefit plan has a document that defines who is covered. In the seminal case Vizcaino v. Microsoft Corp., Microsoft’s exposure came from an alleged disconnect between who its plan said was an “employee” and who actually received benefits.
The Internal Revenue Code permits businesses to exclude “leased employees” from benefits eligibility in most cases. Even in cases in which a worker does not meet the IRS definition of a leased employee, businesses may exclude most contingent workers from benefit eligibility in most cases, without regard to their term of employment.
Accordingly, while term limits are not without use in avoiding unplanned benefit liability, any benefits of term limits can usually be achieved through plan design, without need to use term limits.
Co-employment is unavoidable in most contingent labor situations for the purposes of most laws. There are real costs and benefits to term limits, but avoiding co-employment is usually not one of them.
In fact, a significant cost can be a false belief that there is no co-employment because of a term limit. Term limits can be useful in avoiding some kinds of benefit liability, but careful plan design can be more effective, and can help organizations avoid many of the costs of term limits.
The most important step businesses can take to avoid unintended co-employment liability is to understand what laws and policies apply, and review and modify benefit plans as needed.
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