RP Consultants ~ Business Consultants  Specializing in Labor and Employment Law

The Why, When, Where and How of Adding Administrative Help Part 2 of 2         Personnelly Speaking by Robert Palow, Contributing Editor Temporary Workers Temporary personnel agencies can provide short-term staffing solutions for corporate employers. The use of temporary workers allows companies a flexible means of supplementing their workload for short periods of time or when increased work demands require additional workers. Unlike the relationship with an independent contractor, the client company usually retains the right to direct temporary workers and manage their duties while the temporary workers are on site. Because a temporary personnel agency typically hires, fires, pays, and provides benefits to the temporary worker, it is likely to be considered an employer of the temporary worker. However, depending on the amount of control the client company and the temporary agency exert over the temporary worker or the work performed, the temporary arrangement may make the client company either a sole or joint employer. If found to be joint employers, both companies will be held jointly and severally liable under most employment laws, including nondiscrimination laws, wage and hour laws, OSHA regulations, the National Labor Relations Act, workers compensation laws, ERISA, and the Family and Medical Leave Act (FMLA). There is also the risk that the client company may be found to be the sole employer of the temporary worker if the temporary staffing firm does not exercise sufficient control over the work environment. In addition, unless the temporary personnel agency qualifies as a "temporary service employer," the client company may be liable for unemployment insurance and disability contributions. A company using temporary workers thus may gain flexibility but not be relieved of many of the legal obligations of an employer. Placing temporary workers on site and having them report to a regular employee supervisor who directs their work could make it difficult for the company to argue successfully that it did not exercise control over the temporary workers. Here are some suggested precautionary measures: A written contractual agreement with the temporary agency should specify the nature of the employment relationship and the duties and responsibilities of each party. The contract should require the temporary agency to provide all necessary training. The contract should require the temporary agency to obtain workers compensation insurance for the workers. Distinct paperwork forms should be developed for temporary workers versus regular employees. For example, the temporary worker should sign a "Temporary Worker Confidentiality Agreement," acknowledging that employment is with the temporary agency, not the client company. The temporary worker should not go through regular employees' pre-employment procedures. If a temporary worker is "rolled over" to regular-employee status, the paperwork should generally reflect that the employee's start date is the date of the rollover, not the date the temporary worker began performing services on site. Temporary worker orientation materials and processes should stress that the temporary agency and not the client company employs temporary workers. If possible, temporary workers should be given project work over which the client company does not exercise daily control. Taking these types of precautions, however, does not guarantee that a company using temporary workers will not be deemed a joint employer for employment-related liability purposes. Thus, client companies seeking to avoid employment-related liabilities for temporary workers should insist that the temporary agency indemnify the client company against liabilities that the parties have allocated to the temporary agency. Professional Employer Organizations One recent trend in alternative staffing arrangements is the rising popularity of professional employer organizations (PEOs). Although many employees view PEOs as "employee leasing" companies, there are important differences between a PEO relationship and a leasing arrangement. "Employee leasing" suggests that the client company is leasing a worker from the worker's employer, rather than directly hiring the worker, thereby avoiding employment-related responsibilities and liabilities. In contrast, a PEO arrangement is one in which the PEO and the PEO client company serve as joint-employers of the employees and assume joint responsibility and liability. A PEO arrangement can be especially attractive to small or mid-sized companies because the arrangement allows the client company to focus on its core businesses and to outsource ancillary functions like human resources and payroll. PEOs also offer employee benefits that oftentimes PEO clients cannot otherwise afford. Typically, the client company trains, supervises, and manages the employees, while the PEO handles human resources functions such as payroll, tax withholding, and benefits. The client company and the PEO may determine by contract the circumstances under which each has the right to hire, supervise, discipline, and discharge the employees. As with temporary workers, the client company is able to retain supervisory control over these employees, if it chooses to do so. PEOs differ from temporary personnel agencies because a PEO's client company may be responsible for finding and hiring its employees and the employment relationship has no set duration. As joint employers, PEO client companies remain liable under employment laws, including anti-discrimination laws, wage and hour laws, OSHA, FMLA, and workers compensation laws. PEO clients should determine at the outset the type of workers compensation insurance that the PEO and the client will maintain. A PEO arrangement can also have significant consequences to both the PEO and the client with respect to employment taxes. As a general rule, the IRS will view the PEO as the employer for payroll tax purposes if it has control over the payment of wages and the taxes are timely paid. However, even in situations where the PEO has assumed the payroll tax responsibilities, there is always the risk that the IRS will take the position that the liability has not been shifted away from the PEO client for whom the services were performed. PEO clients also need to be aware of the implications of the PEO relationship for employee benefit purposes. Section 414(n) of the Internal Revenue Code provides that leased employees, for purposes of certain employee benefit provisions, shall be treated as employees of the recipient organization, i.e., the PEO client. An employer whose benefit plans (such as pension, profit-sharing, 401(k) and flexible benefit plans) exclude leased employees risks losing the tax-favored status of such plans if the number and compensation level of excluded leased employees, relative to other employees, are not in accordance with the Internal Revenue Code. In addition, employers who improperly exclude employees from benefit plans on the grounds that they are "leased employees" may be liable for benefits if the employees are found to be common law employees and therefore do not qualify as "leased employees" under Section 414(n) of the Internal Revenue Code. Since a joint-employer/PEO client can be liable not only for its own actions but those of the PEO, it is very important for the PEO client to minimize the potential risks through measures such as the following: Thoroughly investigate the PEO before entering into any kind of business arrangement. Does the PEO use proper screening methods, as well as hiring and termination procedures? Has the PEO been the subject of adverse judicial or administrative decisions? Does the PEO have expertise in the client's state employment law? Verify that the PEO service agreement accurately delineates the employment-related responsibilities of both the PEO and the PEO client. Verify that the PEO service agreement includes an appropriate indemnification clause. Review all the PEO's employment-related documentation (e.g., offer letters, employment contracts, employee benefit plans and employee handbooks). Remember that the PEO client may ultimately be liable for any promises or omissions made by the PEO in these documents. Federal legislation has been proposed to eliminate some of the uncertainty in the area of leased employees by amending the Internal Revenue Code to provide that the "qualified staffing firm" is, for purposes of employment tax liability and employee benefit plan sponsorship, the employer of the employees covered by such staffing arrangements. For now, companies engaging in PEO relationships need to remain aware that PEO arrangements typically will not relieve them of the majority of the legal obligations of an employer. Outsourcing Outsourcing is usually a service by which the outsourcing company takes full responsibility for particular business operations of the client company on a continuing basis. Some companies find outsourcing useful because they can outsource ancillary functions (e.g., human resources, accounting, information technology) and use their own resources to focus more intensely on their core functions. A company's relationship with an outsourcing firm may take on characteristics of any one of the types of relationships discussed in this two-part article. If the outside staffing company is responsible for hiring, managing, and paying its employees who are assigned to the client company to perform work at the client company's worksite, the relationship may be similar to a temporary staffing situation. If the outsourced work is being performed off-site, it may be more analogous to an independent contractor situation. Companies must understand the nature of the various types of employment relationships before contracting with an outsourcing company, in order to avoid confusion about responsibility for employment-related obligations and liabilities. Conclusion The benefits of alternative staffing arrangements vary, depending on which arrangement a company chooses to adopt. Some arrangements, such as independent contractors, provide great flexibility; while others, such as the PEO arrangement, can free the employer of administrative burdens. One arrangement in which I have personally observed small businesses becoming successful (and I've used this idea myself), is to advertise at your local university for an MBA candidate who wants to complete an internship as an independent contractor. They are generally proficient with all of the skills needed for your business and are willing to work on a task or project basis. Except in true independent contractor arrangements, the client company cannot be assured of avoiding employment-related legal responsibilities. Companies that enter into alternative staffing relationships need to understand the potential liabilities and be prepared to take appropriate protective measures. To avoid employment-related liabilities, a company should either engage independent contractors or structure contractual agreements with temporary agencies and PEOs to exercise little or no control over the workers and to receive indemnification as a "safety net" for allocating employer liabilities. About the author Robert Palow is president of RP Consultants, a Placentia, CA based company that specializes in labor and employment practices. He has more than 30 years of management and legal experience in the human resource field. ABSSI / Industry Focus / November 1999 Copyright © 1998 RP Consultants All rights reserved [ Home | Company Info | Published Articles | Services | Feedback ]