Who Is the Employer

By Martha Zackin

May. 15, 2008

Joint employment is a legal doctrine that applies when two businesses exert some degree of control over the terms and conditions of an individual’s employment. Application of this doctrine to the relationship between temporary staffing agencies or outsourcing companies and their clients often results in a finding that both entities—the staffing agency or outsourcing company and its client—are joint employers for purposes of federal employment laws.

    Outsourcing in this context refers to companies—often those in IT services—that come onto the client’s premise and take over a certain function or process. Although some of the work may be offshored, employees of the client who had been involved in this function or process often become employees of the outsourcing company, and continue to work on the client’s premises.

    Joint employers are each subject to the laws governing the employment relationship, including wage-payment laws, anti-discrimination laws, industrial safety laws and the like. Generally, in the absence of contractual terms that provide otherwise, joint employers may share liability for each other’s actions toward their common employees. These common employees may be referred to as temporary employees, contingent workers and contract employees.

    Different laws set different standards to determine whether two entities are joint employers and to what extent each may be liable for the actions of the other. This article will describe those different laws and standards and offer tips on how to minimize the risk of liability under this legal doctrine.

Who is the employee’s employer?
   Government agencies and courts look at a number of factors to determine whether two (or more) businesses are joint employers of an employee, with the right to control being the most important factor. The staffing agency or outsourcing firm will nearly always be the workers’ employer; the more control the agency’s clients exert over the workers, the more likely the client will be considered a joint employer with the staffing agency—and the more likely the client will be held liable for violation of workplace laws.

    In general, a worker is the employee of the company that exercises control over his or her employment. In an agency/client relationship, the “employer” is the entity that, on balance, performs some or all of the following functions:

  • Determines job qualifications

  • Schedules work hours and assigns work

  • Supervises day-to-day activities

  • Has authority to hire, fire and discipline

  • Determines pay and benefits

  • Promulgates work rules and conditions of employment

  • Maintains employment records

    No one factor is decisive and it is not necessary even to satisfy a majority of factors. Rather, all the circumstances in the worker’s relationship with each of the businesses are considered to determine if either or both should be deemed the “employer.”

Different laws, different standards
   Various federal laws come to bear on the question of joint employment, each with its own nuances and scope:

The Fair Labor Standards Act
   The FLSA, the federal statute that governs overtime payments and minimum wage, broadly defines joint employment. Specifically, under regulations implementing the FLSA (29 CFR 791.2), a joint employment relationship may exist if employment by one employer is not completely disassociated from employment by the other employer or where one employer is acting directly or indirectly in the interest of the other employer in relation to the employee. Joint employers are responsible, both individually and jointly, for compliance with all of the applicable provisions of the FLSA.

    With respect to temporary staffing and outsourcing companies, the Department of Labor takes the position that employees of a temporary staffing company are generally joint employees of the staffing company and the business for which they perform services. Each individual company is jointly responsible with the other for proper payment of overtime and minimum wages.

The Family and Medical Leave Act
   The joint employment test is different, and broader, under the FMLA. Pursuant to Labor Department regulations (29 CFR 825.106), two businesses that exercise some control over the worker or working conditions may be joint employers for purposes of the FMLA. Under these regulations, joint employment will ordinarily exist when a temporary staffing agency or outsourcing company supplies employees to its business client/employer.

    Of the two businesses, however, only the “primary” employer—the employer with the authority to hire and fire, assign, discipline and pay—is responsible for giving FMLA notice, providing FMLA leave, maintaining health benefits and providing job restoration. The staffing agency is typically the primary employer. The secondary employer, typically the staffing agency’s client, is responsible for accepting the employee returning from FMLA leave in place of the replacement employee if it continues to utilize an employee from the staffing agency. Both the primary and secondary employers must also refrain from interfering with or discriminating against an employee’s rights under the FMLA. Employees who are jointly employed by two employers must be counted by both employers, whether or not maintained on only one employer’s payroll, in determining employer coverage and employee eligibility under the FMLA.

Federal anti-discrimination laws
   Federal anti-discrimination laws protect individuals from employment discrimination based on protected categories, such as race, sex, color, national origin, age, religion and disability. Business entities with the requisite number of employees (20 for age discrimination, 15 for other types of prohibited discrimination) are deemed “employers” covered under these laws. The anti-discrimination statutes not only prohibit an employer from discriminating against its own employees, but also prohibit an employer from interfering with an individual’s employment opportunities with another employer. Courts and the Equal Employment Opportunity Commission, the federal agency charged with enforcing federal anti-discrimination laws, incorporate and apply joint employment liability when contingent workers bring discrimination claims.

    EEOC guidance is clear that both staffing and outsourcing firms and their clients share equal employment opportunity responsibilities toward workers. If both the staffing firm and its client have the right to control the worker, and if both are “employers” under the statutes, they are covered as “joint employers.” Even if the businesses are not “joint employers,” as where the client does not exert control over the staffing firm’s workers, the client may be held liable for discriminating against an individual who is not its employee, if it is found to have interfered with an individual’s employment opportunities with the staffing firm.

    In short, a staffing or outsourcing firm must hire and make job assignments in a nondiscriminatory manner. The staffing firm’s client must treat the staffing firm worker assigned to it in a nondiscriminatory manner. The staffing firm must take immediate and appropriate corrective action if it learns that the client has discriminated against one of its workers.

    Where the combined discriminatory actions of a staffing firm and its client result in harm to the worker, both entities are jointly and severally liable for back pay, front pay and compensatory damages, meaning that damages can be obtained from either one of the entities alone or from both combined. Punitive and liquidated damages, if applicable, are individually assessed against and borne by each entity in accordance with its respective degree of malicious or reckless misconduct.

Occupational Safety and Health Act
   Joint employer liability is more limited under OSHA, as staffing or outsourcing agencies will generally be cited only if necessary to correct a violation, or if the agency knew or should have known of the unsafe or hazardous condition and failed to take remedial action. The party in direct control of the workplace and actions of the employees is typically the sole entity responsible for record keeping and for keeping the workplace safe.

Tips to minimize liability
   Business entities that use temporary staffing employees or have outsourced certain business functions to contract workers can—and should—take steps to minimize their risk of liability. These steps are both contractual and functional.

    The contract between the client and its temporary staffing or outsourcing vendor should clearly articulate that the vendor is solely responsible for:

  • Managing all aspects of its employees’ employment, including: recruiting, interviewing, hiring, training, assigning, disciplining and firing employees; determining wages; evaluating performance; and handling employees’ complaints.

  • Payment of wages, benefits and taxes.

  • Legal compliance with all employment laws including, for example, laws pertaining to immigration, wages, discrimination and safety.

    The contract should also provide for indemnification, so that the staffing or outsourcing agency is responsible for legal fees and costs that may be incurred by the agency’s client in defense of cases stemming from the agency’s noncompliance. Further, the contract should allow for periodic audits to verify compliance.

    In the end, however, what the contract says will not matter if the actions taken are different from what’s on paper. Therefore, on a practical note, the staffing firm client should not treat contract employees exactly as it treats its own workers. For example, contract employees should not be provided with business cards referencing the client’s business and should not be allowed to sign letters or other documents on behalf of the client.

    In sum, temporary staffing agencies and outsourcing firms are an integral part of the modern workforce. However, the benefits of using staffing and outsourcing firms may be outweighed by the increased risk of legal liabilities if care is not taken to minimize and manage that risk.

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