Protecting the customer

By Edward Lenz, American Staffing Association

In the past decade, several lawsuits have been filed by staffing firm employees who sought retroactive benefits from the customers to which they were assigned. This underlines how critically important it is for staffing firms and their customers to fully understand what the risks are and how to mitigate them.

In 1993, former Microsoft freelancers, who were later assigned to Microsoft through various staffing firms, sued for retroactive benefits under the company’s 401(k) and stock purchase plans (Vizcaino v. Microsoft). Microsoft rejected the claims on the basis that the company’s plans excluded the workers. A federal appeals court in California ultimately held that the workers were common-law employees of Microsoft, that the plan language did not effectively exclude them, and that they were therefore eligible for Microsoft benefits. The case was settled in 2000 after Microsoft agreed to pay almost US$100 million in benefits under its discount stock purchase plan.

Since the Microsoft case was decided, the issue of whether staffing firm employees are eligible for customer benefits has been raised in a number of other lawsuits, most of which were successfully defended by the customer. This article summarizes the steps staffing firms and customers can take to reduce the likelihood that such suits will be brought against them and to increase the customer’s chances of successfully defending suits that are filed.

Minimizing contacts
Courts weigh a number of factors in determining whether an employee-employer relationship exists between a staffing firm and a customer. In 1987, the Internal Revenue Service published a ruling listing 20 common-law factors relevant to this determination. The ‘20-factor test’ looks at whether the business exercises sufficient control over the worker to establish an employer relationship.

Here are some tips to help reduce the likelihood that a customer will be viewed as a common-law employer for benefits purposes:

• Customers should rely on the staffing firm to recruit the workers.
• Customers should avoid ‘payrolling’ arrangements – i.e., where the customer merely shifts its own employees to the staffing firm’s payroll.
• Staffing firms should provide general worker training. Customers, of course, still must provide worksite orientation and safety training.
• Staffing firms should maintain the right to reassign, fire and discipline the workers.
• Customers should not assign workers to new projects without the staffing firm’s approval.
• Customers should not dictate pay rates, raises and benefits.
• Staffing firms should handle employee complaints.
• Staffing firms should reimburse workers for job-related expenses.

Strategic exclusions
In addition to minimizing their contacts with staffing firm employees, customers should draft their benefit plans to clearly exclude all temporary, contract and leased employees. Courts and the IRS have recognized employers’ right to do this, even if the workers are later reclassified as its common-law employees. Note that this might not be an option in the case of stock purchase plans such as those involved in the Microsoft lawsuit because IRS rules applicable to such plans require virtually all employees to be covered. As a result, most employers that provide stock purchase plans use non-qualified plans, which are not subject to those rules.

Employee waiver agreements
In addition to plan exclusions, consideration should be given to asking employees to sign agreements that waive their right to the customer’s benefits. Such agreements, which some courts have upheld, should be tailored to particular customer situations and expressly sanctioned by the customer’s benefit plan. Customers should consult with expert legal counsel regarding the drafting of such agreements.

Limiting assignments may not be a good strategy
Some staffing firm customers impose time limits on temporary assignments in an effort to avoid benefits liability. Although this may help reinforce the notion that staffing firm employees are not common-law employees of the customer, it is not necessarily the best solution legally or operationally, and may even carry some legal risk of its own.

For tax and benefits purposes, length of service is only one of many factors involved in determining whether the worker is a common-law employee of the customer. Employees are not automatically entitled to benefits just because they work for a specified period of time. Time limits may even be risky if the customer has not clearly excluded the workers from its plan since it might be construed as an unlawful effort to deny benefits.

Time limits also don’t insulate customers from liability in other areas – for example, under equal employment opportunity and wage and hour laws – and results in employee turnover that can disrupt business operations and damage worker morale.

Customers may therefore be better served by limiting their contacts with staffing firm employees, amending their benefit plans to clearly exclude them, and using properly drafted employee agreements.

Ed Lenz is senior vice president, public affairs, and general counsel of the American Staffing Association. While every effort has been made to ensure the accuracy of the above information, it is not intended as, and should not be relied upon, as legal advice. Competent counsel should be consulted with regard to the issues discussed.