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The Temp/Contract Conundrum

With legal liability heating up and a contingent workforce on the rise, your temp- and contract-worker policies may not be as stable as you think. Some of this year's Most Powerful Employment Attorneys offer their insights.

Thursday, June 16, 2011
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It's no secret that more and more companies are forgoing full-time workers and replacing them with contingent hires -- including part-timers, temps and independent contractors.

Let's face it: They're often cheaper. They give companies the flexibility to hire for specific projects without taking on full-timers. Companies can seek out specialized skills, avoid payroll taxes and bring retirees back into the mix.

And, oftentimes, companies don't have to pay them benefits or overtime.

The contract-worker trend is booming now because it allows employers to ride the tide of a tenuous economic recovery. For a cheaper price tag, contingents can help companies as the economy continues getting better. If things worsen again, companies can easily part ways with them.

The use of contingent workers is in hyperdrive, with roughly half of all new post-recession hires being contingent, according to a report by San Francisco-based Littler. The law firm estimates that such workers now make up 25 percent of the workforce, compared to about 15 percent pre-recession.

A study by Right Management in Philadelphia finds a similar trend, reporting that 41 percent of companies say they've used more independent contractors over the past two years.

But this burgeoning contingent workforce comes with lots of potential legal pitfalls, from confusing wage-and-hour laws to the threat of class-action lawsuits from workers who believe they were misclassified, says Lee Schreter, a partner at Littler in Atlanta.

Schreter (as well as all the attorneys interviewed for this article) is one of Human Resource Executive®'s Most Powerful Employment Attorneys for 2011, a list compiled exclusively for HRE by Lawdragon, a Los Angeles-based networking site for lawyers and clients.

The attorneys were named to the list based on a host of criteria, including tenure, impact and importance of cases handled, and publications and influence among peers. (See the list of the Top 100 and individual break-out lists for Employee Benefits and ERISA, Immigration, Labor and Up & Comers.)

Schreter and others on the list express concerns about the increasing contingent challenges, and HR's role in keeping employers on the right side of the law. That's not an easy task, considering wage-and-hour class-action lawsuits account for 84 percent of all employment class-actions filed, according to several news reports.

The U.S. Department of Labor, meanwhile, estimates that more than 80 percent of employers are not complying with federal and state wage-and-hour laws.

Adding fuel to the fire, the DOL has recently vowed to crack down on employers that misclassify workers.

Attorneys on the Most Powerful list don't recommend abolishing the practice of hiring contingent workers -- after all, good business is good business.

But they say employers, and their HR leaders, need to pay much closer attention to the details and what might be lawsuits-in-the-making. Many organizational leaders, they say, are just perplexed by the regulations and find themselves unwittingly breaking wage-and-hour laws.

To continue hiring contingent workers and remain on the right side of the law, the attorneys recommend writing a contract spelling out the contingent-worker relationship, finding relevant state and federal classification tests and complying with them, doing a case-by-case analysis of every contingent worker and making sure those workers have some independence.

Following these steps can help companies continue to benefit from the contingent labor pool, which -- in turn -- can help them remain profitable in a recovery.

Outdated Law, Outright Confusion

While the Fair Labor Standards Act has been protecting workers in terms of minimum wages and overtime pay since its adoption in 1938, it is, nevertheless, a very old law.

Though most agree the regulations it established were necessary, the law today is forcing businesses to grapple with some outdated and vague wage-and-hour rules that have gotten increasingly confusing with every legal precedent that's set. And it's making it much tougher on employers of contingent workers.

For example, imagine calculating overtime for a contingent worker who is salaried, but still entitled to overtime pay. Overtime is calculated by dividing the number of hours worked by the base pay. Say someone works 42 hours one week, then 50 hours the next with a base pay of $2,000 for a standard 40-hour work week. During the first week, the employer divides the $2,000 by 42 hours to figure out the hourly rate for the remaining two hours ($47.62), then multiplies that by time-and-a-half per hour.

By the same calculation, the overtime rate for the 50-hour week is only $40 (paid as time-and-a-half for the extra 10 hours.)

And it can get more complicated if you add holiday time, premiums, extra pay for travel time or weekends to that calculation.

"We're dealing with a federal statute that went into place the year the Wizard of Oz came out," says Paula Barran, partner at Barran Liebman in Portland, Ore., referring to the classic film released in 1939. "If you print out the regulations and try to study through them, it's surprising how many things end up unanswered. So you make the best guesses you can.

"A lot of mistakes are being made," she says, "not because [companies] are turning their backs on compliance, but because there is so much to learn and so much to know."

Zachary D. Fasman, co-chair of the Employment Discrimination Department at the law firm Paul Hastings in New York, says complying with the law is simply too tough.

"It's hard to think of any major employer where you could confidently predict that they're in compliance with federal or state wage-and-hour laws as a general matter," he says.

Gary Moss, a partner in the Las Vegas office of Jackson Lewis, agrees noncompliance is rampant, but says he thinks companies are desperately trying to comply.

"We don't have clients who are out there willingly subverting the law or avoiding the law," he says. "It's usually ... good faith in the people we represent. It's just misplaced, in some cases."

In plenty of cases, employers may have been practicing the same contingent-worker policies for years, not knowing they're out of compliance, says Moss.

"The employers get complacent [because] they're doing [the same thing] over a period of time and nothing has gone wrong, so they don't think there's any reason to be concerned," he says. "Then, all of a sudden, you get a disgruntled employee or a situation goes badly and you have an issue that pops up."

Further exacerbating the situation, says Joe Costello, practice group leader for Morgan Lewis' labor-and-employment practice group in Philadelphia, is that businesses are getting vilified for using contingent workers -- even though the practice is legal and many companies handle their contingent books correctly.

"The act of characterizing someone as an independent contractor is becoming demonized ... ," he says, noting that companies that hire contingents may get reputations as employers that cheat workers out of pay and benefits.

The court case that put the contingent-worker issue on the map was Vizcaino vs. Microsoft, settled in 2000. A group of thousands hired as temporary or freelance workers sued the Redmond, Wash.-based computer giant claiming they should have been classified as employees -- gaining participation in generous Microsoft benefits, including stock options. Microsoft settled for $97 million.

"It's the case that got the world's attention because of the magnitude of the liability and the prominence of the company," says Moss.

It's not that Microsoft didn't carefully think about how it classified workers, and the company certainly had excellent legal representation, says Barran.

And it still couldn't win.

"We always look at Vizcaino as an example of, 'Here's what happens if you guess wrong,' " she says.

Since the Microsoft case, litigation over classification has been on the rise.

FedEx, for example, is in the midst of a bitter dispute over whether its FedEx Ground drivers are independent contractors or employees.

Some state courts have decided that the drivers were employees while others have not. Experts estimate that the case could cost FedEx $1 billion in back wages if the company ultimately loses.

"Bounty" Hunt

Companies had better watch out because a government crackdown is on.

The DOL has been teaming up with states to pursue businesses with improper contingent-worker relationships. Some states, Schreter says, even see this noncompliance as a way to fill their depleted budgets because the DOL offers grants to states encouraging them to challenge contingent-worker relations.

"It's almost like a bounty."

The DOL, however, believes it's just targeting employers that prey on workers by unlawfully denying them benefits and not providing fair work arrangements. In its Strategic Plan for Fiscal Years 2011-2016, the DOL says it will investigate "fissured industries" -- sectors such as agriculture, custodial, construction and hospitality -- that have "redefined employment relationships" by hiring subcontractors, third-party vendors, franchisees or independent contractors.

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Contingent relationships "alter who is the employer of record or make the worker-employer relationship tenuous and less transparent," according to the DOL. "These are industries in which the employment relationship is splintered and the beneficiary of the labor is distanced from the workers who are providing the labor. Employers in these industries often fail to recognize or classify such workers as employees, which leaves the workers subject to unfair treatment and disparate wages."

But complying is tricky, say attorneys, because there's no uniform test to determine who should be considered an employee and who is an independent contractor.

Schreter says there is one test under federal law, another that the DOL has articulated under the FLSA, an Internal Revenue Service test for state-tax purposes, a test for state unemployment taxes, and one to see if employees are subject to overtime and wage-payment requirements.

Exhausted yet?

The issue is becoming so widespread that Littler has created its own department just to deal with it.

"We already have 25 lawyers in a practice group that specialize in this field ... ," says Garry G. Mathiason, Littler's chairman of the board. "The government is desperate for revenue and there's a belief that there are billions of dollars lost in tax revenue" due to misclassification.

A first step for protection is to draft that previously mentioned contract that defines the relationship between contingents and company.

Are contingent workers doing the exact same job as an employee? Do independent contractors have business licenses? Are they free to engage in relationships with other businesses?

HR should also consider adopting a policy that identifies the process for choosing vendors and the duration of vendor relationships while making clear how temporary workers can log a complaint or issue with the company.

"Where does that individual go? [If there is an issue], the liability can spread out to anyone who, sort of, touches the situation," says Barran. "It becomes even worse if the individual doesn't know how to raise a complaint effectively.

"You don't want them falling between cracks in workers' compensation coverage," she says. "You don't want them falling between the cracks on 401(k)s. Make sure, if you've got a benefits plan, a pension plan, that you know whether this individual is a participant or not."

Another resource for companies trying to find contingent-worker solutions, says Fasman, is the IRS' 20-factor test to determine if employees are independent contractors.

"If the IRS came in and did an audit, could you pass it? If you can't pass it," says Fasman, "do you want to admit that these people are employees and pay them accordingly or ... change the terms and conditions of their employment?"

Another good way to limit legal liability is to hire contingent workers through a staffing firm -- which many large employers use.

"In many cases, if that's a substantial company, it has its own human resource capabilities and that sort of thing, so less chance of having a problem there," says Moss.

But if you think using a temporary agency keeps you in the clear, think again. If a temp agency is found to have unlawful practices or is misclassifying workers, the client company may also be liable, says Mathiason.

He recommends companies do an audit of all contingent workers, whether hired internally or through an outside company.

Safety First

Also troubling employers of contract and temporary staffs is the question of ensuring workers' -- and customers' -- safety.

Take a hospital, for example. How can it protect against a part-time nurse coming in for a morning shift with little or no sleep after working overnight at another hospital?

Barran recommends policies simply state that workers have to disclose secondary employment.

" 'If you're going to take another job you're going to have to tell us,' " she says.

But just because you have the right to adopt such a policy doesn't mean contingent employees will actually tell you about other jobs. So Barran recommends good old-fashioned "managing by walking around" so managers not only get to know their employees well, but can detect early warning signs of fatigue or stress.

Costello, however, says safety is safety -- whether the person is a contingent worker or not. Either one could be moonlighting without the company's knowledge.

"To me, it's the same issue whether it's an employee or an independent contractor," he says. "A company needs to be committed to a safe workplace and needs to make sure it has policies that make workplace safety a priority."

And that also means organizations teaming up with staffing companies should make sure they spell out their safety concerns to their vendors, says Moss.

"You've got to say," he says, " 'Make sure he's got eight hours rest and is drug-free.' "

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