MISHRM 2014 Annual Conference

MISHRM 2014 Annual Conference HR Amplified: Driven to be…

direct hire vs. contingent – what is best for your company? David Cessante – Clark Hill PLC

Overview • Contingent workers are those individuals “who do not perceive themselves as having an explicit or implicit contract for ongoing employment” • Many contingent workers are jointly employed • In joint or co-employment relationships, both employers typically share legal responsibilities relating to contingent employees

Overview • Three types of contingent workers: • Temporary Employees • Leased Employees • Independent Contractors

Types of Contingent Workers • Temporary Employees • Employees who are hired for a specific job or for a limited period of time without an expectation of long-term employment as a regular employee • Often provided to client companies by temporary staffing agencies • Day-to-day activities are controlled by the worksite employer • Most are jointly employed

Types of Contingent Workers • Leased Employees • Employees who are provided by a professional employer organization (PEO) to a client company for a fee • PEO manages all personnel matters, including payroll, benefits, human resources functions and compliance reporting • Client company controls the day-to-day duties and direction of the employee • Almost always jointly employed

Types of Contingent Workers • Independent Contractors • “Free agents” who do not regularly work for a single employer • Not subject to the direction and control of the client/employer • Often misclassified

Workers’ Compensation • If joint employment exists, both employers receive benefit of the exclusive remedy provisions of the workers’ compensation statutes • Employers must have “shared” control over the subject employee • Generally, staffing agencies and their clients are both considered “employers” for workers’ compensation purposes • Not applicable to independent contractors

Employment Taxes • According to the Internal Revenue Code, the “employer” is the entity with “control of the payment … of wages” • Typically, the staffing agency is considered the employer because it pays wages • Staffing agency is responsible for withholding taxes

Fair Labor Standards Act (FLSA) • Applies to joint employment relationships • Joint employment status “depends upon all the facts in the particular case,” but will generally be found where there is an “arrangement between the employers to share the employees’ services”

FLSA continued… • Courts use the “economic reality” test • Factors include: • Who controls the employee’s duties and schedule; • Who pays wages; • Who has the right to hire, fire and discipline; and • Who maintains the employment records

FLSA continued… • If joint employment exists: • Both companies are responsible for wage and hour compliance; and • Both companies are jointly and severally liable for violations of the wage and hour laws • According to the DOL, the staffing firm is responsible for keeping records of hours worked and overtime pay for its contingent employees • However, the client company may also bear responsibility for overtime pay if the contingent employee worked more than 40 hours in the week for the client company

Immigration • The Department of Homeland Security regulations do not specifically address leased or temporary employees • However, the regulations state that “in the case of an independent contractor or contract labor or services, the term ‘employer’ shall mean the independent contractor or contractor and not the person or entity using the contract labor.” • Generally, the client company is not required to verify the status of the staffing firm’s employees • However, client companies cannot knowingly employ individuals who are unauthorized to work in the United States • Knowledge includes “constructive knowledge,” which can be inferred through “notice of certain facts, and circumstances that would lead a reasonable person ... to know about a certain condition”

Employee Benefits • Generally, client companies are not required to provide health and pension benefits to temporary or leased employees • Under Section 414(n) of the Internal Revenue Code, client companies are required to count “leased employees” for purposes of coverage tests, unless: • The leased employees’ tasks are controlled by the staffing firm; not the client company; or • There is no oral or written agreement between the parties relating to the leased employee(s)

Employee Benefits continued… • A “leased employee” is anyone on assignment at a client company who has “performed services on a substantially full-time basis for a period of at least one year” • Leased employee has worked for the client company for more than 1,500 hours during a 12-month period; or • Leased employee has worked for the client company for a number of hours equal to at least 75% of the average number of hours that are customarily performed by an employee of the client company in the particular position

Employee Benefits continued… • Client companies can rely on the staffing firm’s employee records for determining hours worked by leased employees • Section 414(n) does not require the employer to provide leased employees with benefits or allow them to participate in the employer’s benefit plans

Employee Benefits continued… • The “1000 Hour Rule” • ERISA requires employers to offer retirement benefits to employees after they accrue 1,000 hours in a 12-month period • The rule only applies to the employer’s own employees; not leased or temporary employees

Employee Benefits continued… • Golden Rule: Plan documents should be carefully drafted to exclude leased and temporary employees

Discrimination / Harassment • Joint employer theory • Both employers may be subject to liability for discriminatory acts and/or harassment • Staffing firms and client companies are liable for their own discrimination and discrimination by the other entity if it participates in the discrimination or knew or should have known of the discriminatory action and failed to take corrective action within its control

Discrimination / Harassment • Michigan courts apply the “economic reality” test when determining if joint employment exists: • Control of a worker’s duties • Payment of wages • Right to hire and fire and the right to discipline • Duties are an integral part of the employer’s business

Discrimination / Harassment • The EEOC will look to whether “one or both businesses have the right to exercise control over the worker’s employment.” • If both the staffing firm and client company have the right to control the worker, they are joint employers • Generally, the EEOC will find that staffing firms and client companies are joint employers of the temporary and/or leased employee • Staffing firms and client companies must count every worker with whom they have an employment relationship when determining whether they have 15 employees

Discrimination / Harassment • EEOC enforcement guidelines state that the staffing firm is liable “if it participates in the client’s discrimination” or “if it knew or should have known about the client’s discrimination and failed to undertake prompt corrective measures within its control.” • A staffing firm “participates” in discriminatory practices if it honors client requests based on discriminatory reasons

Discrimination / Harassment • “Prompt corrective measures within its control” include whether the staffing firm: • Ensured that the client is aware of the alleged misconduct; • Asserted the firm’s commitment to protect its workers from unlawful harassment and other forms of prohibited discrimination; • Insisted that prompt investigative and corrective measures be undertaken; and • Offered the worker an opportunity, if s/he so desires, to take a different job assignment at the same rate of pay

Discrimination / Harassment • When a staffing firm and a client company are both responsible for discrimination, they are jointly and severally liable for damages • Punitive damages are based on each entity’s degree of responsibility for the discrimination

Discrimination / Harassment • Integrated employer liability • Exists when a client company and a staffing firm are so closely integrated that they are deemed a single employer for purposes of liability

Discrimination / Harassment • Courts look to the following factors to determine whether two entities are a single integrated employer: • Interrelation of operations, such as common offices, common record keeping, shared bank accounts and equipment; • Common management, common directors and boards; • Centralized control of labor relations and personnel; and • Common ownership and financial control

Americans with Disabilities Act (ADA) • Liability is similar to Title VII • Staffing firms and client companies are liable for their own discrimination and discrimination by the other entity if it participates in the discrimination or knew or should have known of the discriminatory action and failed to take corrective action within its control

ADA continued… • Medical Examinations • Staffing firms can conduct post-offer medical exams as long as they do so for all individuals entering the same job category • Staffing firms and/or client companies can revoke an assignment based on the results of a medical examination if the reason for doing so is job related and consistent with business necessity • Staffing firms can revoke an offer if the assignment begins before the medical examination results are obtained

ADA continued… • Reasonable Accommodations • Client companies are not responsible for providing reasonable accommodations when the applicant applies directly to the staffing firm • However, client companies must provide reasonable accommodations if they send applicants to a staffing firm to apply there • Once employed, the client company and staffing agency will both be responsible for ensuring that the employee is provided with a reasonable accommodation • Undue hardship may be claimed by the staffing agency or client company if, after engaging in good-faith efforts, the party attempting to provide the accommodation cannot obtain the other party’s cooperation in providing the accommodation

Family Medical Leave Act (FMLA) • Primary employer and secondary employer • The primary employer is the employer that has the authority to hire and fire, assign or place the employees, determine pay rates and pay employee salary and benefits • The primary employer is generally the staffing firm under the FMLA

FMLA continued… • The primary employer must: • Give required notices; • Provide leave; • Maintain health care benefits during the leave; and • Restore the employee to his or her job at the end of leave

FMLA continued… • The secondary employer must accept the employee returning from leave in place of the replacement employee if the secondary employer continues to utilize an employee from the staffing agency • The secondary employer is also prohibited from: • Interfering with an employee’s attempt to exercise rights under the Act, or • Discharging or discriminating against an employee for opposing a practice that the Act prohibits

FMLA continued… • Employees who are jointly employed must be counted by both employers, whether or not maintained on one of the employer’s payroll, in determining employer coverage and employee eligibility • If hired away from the staffing agency, the time a temporary employee worked for the client employer will be counted towards the eligibility requirements (i.e., 12 months/1,250 hours)

Section 1981 • Allows independent contractors to bring claims for race and/or national origin discrimination

Form EEO-1 • Must be filed by: • Private employers with 100 or more employees; and • Federal government contractors with government contracts of $50,000 or more and 50 or more employees

Form EEO-1 • For purposes of the EEO-1 form, “employee” means any individual on the payroll of an employer who is an employee for purposes of the employer’s withholding of Social Security taxes • Leased employees are included in the definition of “employee” and must be included in the staffing employer’s EEO-1 report • “Employee” does not include: • Persons who are hired on a casual basis for a specified time, or for the duration of a specified job; • Persons temporarily employed in any industry other than construction, such as temporary office workers; or • Persons who are referred by a staffing agency for work to be performed on the premises of another employer under that employer’s direction and control

OSHA • Generally, staffing firms will only be cited for OSHA violations at a client site if it is necessary to correct the violation, or if the staffing company knew or should have known of an unsafe condition • Client companies are responsible for recordkeeping requirements under OSHA • Leased employees must be notified of any hazardous substances in the workplace • This is often a joint responsibility between the staffing agency and the client company

Independent Contractors • U.S. Department of Labor study found that between 10%-30% of employers that were audited had misclassified workers • The IRS estimates that it loses $20 billion per year due to worker misclassification • DOL has devoted millions of dollars to its budget for enforcement actions

Independent Contractors continued... • Multiple tests exists to determine if an individual is an independent contractor • The main focus of the tests is whether the subject entity or individual controls the “process of work” • If the company controls the process, the worker is likely an “employee” • If the worker controls the process, the court will be more inclined to classify the worker as an independent contractor

Independent Contractors continued... • IRS test • Behavioral Control: Who has control or the right to control what the worker does? • Financial Control: Are the business aspects of the worker’s job controlled by the individual or the company? • Relationship of the Parties: Employees are more likely than independent contractors to receive benefits, such as insurance, pension and paid leave

Independent Contractors continued... • Employers who misclassify employees as independent contractors are subject to substantial penalties • “Well-intentioned mistakes” • “Well-intentioned mistakes” coupled with the failure to file Forms 1099 • “Willful” noncompliance

Independent Contractors continued... • Safe harbor provision applies if the taxpayer: • Has consistently treated the worker and all other workers holding “substantially similar” positions as non-employees for federal employment tax purposes; • For the tax year at issue, reported on a Form 1099 the amount of compensation paid to the worker during the year; and • Treated the worker as a non-employee in reasonable reliance on a reasonable basis

Independent Contractors continued... • “Reasonable basis” must be based on: • Acceptable legal precedent; • A prior IRS audit; or • A long-standing industry practice

Advantages to Using Contingent Workers • Avoid the expense and hassle of personnel administration • Obtain better and cheaper employee benefits and reduced insurance costs • Facilitates compliance with various employment laws • Avoid increases in unemployment insurance contributions • Greater flexibility with the employer’s workforce • Fixed costs

Disadvantages to Using Contingent Workers • Employer may sacrifice control over workforce and/or operations, while inheriting many of the responsibilities of a direct employer • Potential increased cost per employee • Small employers may be liable under employment statutes that might otherwise not cover the employer • Unanticipated exposure if contingent workers are misclassified

Practice Pointers • Do your homework to ensure that the staffing agency meets your needs • Obtain hold harmless and indemnification clauses in staffing agreements • Make certain that workers are properly classified in staffing agreements

Practice Pointers • Include a lease-to-hire provision in the staffing agreement • Include a provision in the contract that the staffing company will remove employees the client company is not satisfied with, for any or no reason • Client companies should not keep personnel records on contingent employees

Practice Pointers • Ensure that company benefit plans exclude supplemental staff provided by staffing firms • If large numbers of contingent employees work for indefinite periods of time, require the staffing agency to provide an on-site presence to supervise these workers • The client company should report all issues with contingent workers to the staffing agency

David M. Cessante 313.965.8574 dcessante@clarkhill.com

MISHRM 2014 Annual Conference