entrepreneurshipresource center

The Resource Center has all the info you'll need From content to user feedback, the resource center has the information you need for every level of the entrepreneurial process.

Legal Issues With Use of Leased Workers

Dan S. Cross, Attorney, The Overton Law Firm, PC

Although management needs should always be paramount in determining how to engage a workforce, there are significant legal issues that must be addressed when workers are not on the company payroll. Management issues include: (1) the potential administrative costs of hiring, training, and paying a worker on the company payroll; (2) the need for company supervision of the work; i.e., for quality control; (3) the availability of candidates to fill positions; (4) whether the work to be done require skills that the company wants to retain; and, (5) whether the work has to be done on the company premises and under the supervision of the company.

There are advantages to use of leased workers, such as: (1) leasing agencies often provide employee benefits that cannot be matched by smaller companies; (2) leasing agencies withhold all appropriate taxes and pay for FICA, worker's compensation and unemployment insurance; (3) there is no obligation to continue use of an individual leased worker, i.e., an unsatisfactory worker may be immediately replaced; (4) leasing agencies are liable for claims for compensation by its employees; and, (5) leased workers can handle peaks in the company's workload without the administrative costs of hiring temporary employees.

Some disadvantages of leased workers are: (1) companies often regret situations where non-employees develop expertise about the company business, only to move on to a new customer when the assignment expires; (2) employee leasing agencies typically charge 15 to 30 percent more than the going hourly rate; and, (3) lack of leasing agency knowledge about the company's specific needs, and (4) the leased worker does not necessarily owe the company a duty of loyalty, as would an employee.

Legal issues often arise with leased workers when the leasing agency fails to properly pay its employees or leased workers make claims for unemployment or for employee benefits from the company.

Legal Issues With Leased Workers 

When the company exercises control over the work of the leased worker with respect to, for example, assignments, hours, training and termination, the company could be deemed a joint employer of the employee. ("Joint employer" status means that the company would be viewed as the employer of its leased workers, in addition to the leasing agency being the leased workers' employer.) Joint employer status can lead to legal liability for a company from claims by leased workers for benefits, pay and damages based on, for example, claims of discrimination.

Even nominal supervision of leased workers by a company can subject it to claims of unlawful discrimination from leased workers about conduct occurring at the company. Leased employees are likely to be deemed company employees when there are violations of the Fair Labor Standards Act. It is imperative that the leasing company engaged by a company pay its employees in compliance with the law.

Company employee benefit plans may be found to cover those leased workers who claim they are employees of the company based on a joint-employer theory. When use of a leasing company is deemed to be a sham to avoid tax obligations, the company can be liable for withholding taxes (and penalties) unpaid by the leasing agency.

If use of leased workers will result in loss of employment by unionized employees, there is probably a company duty to bargain with the union over the decision to engage leased workers. In any event, use of leased workers may violate the recognition clause or other terms of the company's collective bargaining agreement with the union.

Ways to Manage Leased Worker Issues

Risks of liability due to a company being deemed a joint employer can be minimized in several ways. The company should make sure that the leasing agency retains as much control as possible over the terms and conditions of the leased worker's employment. The leasing agency should be responsible for setting pay and benefits of leased workers, for all negotiations with its customers, for all work assignments, for discipline, for performance counseling, etc. The company should take no action that could interfere with a leased worker's right to work with other employers. The leasing agency should determine who is sent to the company, and the company should not "hire" a worker by sending a worker to the agency for placement back with the company.

The leased worker should not be treated as an employee, e.g., the company should (i) provide badges for leased workers indicating non-employee status, (ii) prohibit leased worker attendance at employee functions, and (iii) the company should not provide leased workers with a company credit cards, long-distance cards, company stationary or business cards. Everything provided to a leased worker should be essential to the leased worker's assignment, and nothing that is not required for the assignment should be made available to the leased worker. Leased workers should be precluded from attending employee functions and meetings, except those which are specific to the leased worker's assignment.

There is no substitute for use of an established and reputable leasing agency because there should be a realistic chance of recovering damages from the leasing agency if the contract is breached. One effective way to manage use of leased workers is to have a detailed agreement with the leasing agency. In addition to standard contract terms, the agreement should provide for:

  • Use by the company of other leasing agencies when the company deems it appropriate.
  • A confidentiality agreementsigned by both the agency and individual workers assigned to the company prohibiting use or disclosure of company information.
  • The right to terminate or replace a leased worker without notice or cause.
  • Identifying the leasing agency as a contractor independent of the company and including in the agreement any statutorily-mandated contract language.
  • Minimum levels of commercial general liability insurance for the agency.
  • Agency compliance with all laws, including anti-discrimination laws, laws requiring overtime compensation, and withholding requirements.
  • The agency to treat the workers as its employees for all purposes, including for payroll purposes and for withholding obligations.
  • Compliance with company rules by all leased workers on company premises.
  • Drug and background screening, as appropriate, of all workers sent to the company by the leasing agency.
  • Hiring by company of leased workers for no fee or a small fee.

Litigation

Regardless of the steps taken to minimize claims by leased workers, a governmental agency or a former independent contractor may claim employee status. The written agreement with the leasing agency should be readily available. Once a claim is made, legal counsel should be contacted immediately, prior to any contact with the former leased worker or governmental agency.

Conclusion

When companies utilize leased workers on a regular basis, it is important that the legal issues be addressed. For example, the company should institute process that allows knowledgeable employees to determine (1) whether a manager's request for leased workers is appropriate from a management perspective and (2) if leased workers are being engaged and used appropriately. The company employees responsible for such decisions should be held accountable for their decisions, and the company should support conservative determinations, with a bias towards classifying workers as employees.

Such a process would be effective in reducing potential liability from use of independent contractors and leased workers because centralized decision-making allows for tracking of their use. Also, centralized decision-making should create more consistent and informed decisions about classification of workers; e.g., should a leased worker on company premises for the last two years be terminated or put on the company payroll?

Another suggested course of action is for a company to amend its benefit plans, including severance plans or policies, to specifically exclude from participation and eligibility (a) all workers not on the payroll, and (b) all leased workers and all independent contractors who are identified as such by contract.

In support of these management and legal issues, one way to address the legal issues associated with use of leased workers is to use the following six-step decision process:

  • Is it advantageous to have the worker off of the company payroll? If so, should the worker be treated as an independent contractor or as a leased worker? (If the worker is to be on the company payroll, go to #5.)
  • If the worker is to be off the company payroll, can the worker be properly classified as an independent contractor?
  • If the worker is to be off the payroll and does not qualify as an independent contractor, is it appropriate to obtain a worker only through a leasing agency?
  • If the worker cannot properly be classified as an independent contractor, and will not be obtained through a leased worker agency, then the worker should be placed on the company payroll.
  • Will the employee be put in a long- or short-term position? With a fixed termination date?
  • For which benefits, including severance benefits, will the employee be eligible?

This decision process should result in all workers being appropriately classified.

As a final thought, issues regarding use of independent contractors and leased workers should be addressed with common sense. If a company worker looks and is treated like an employee, then the worker should probably be classified as an employee. A company should also make sure its policy on use of non-employees is clearly communicated and that all employees have a common understanding of terms like "contract employee," "temporaries," etc.

It is possible to utilize leased workers effectively and to comply with the law. This Article should help with identification of workforce issues and may provide a useful framework for resolution of legal issues with use of independent contractors and leased workers.

Editor’s Note : The information in this article is provided for educational and informational purposes only. This information does not provide legal or other professional advice and is not the substitute for the advice of an attorney. If you require legal advice, you should seek the services of an attorney familiar with your specific legal situation and the laws of your state.

© 2007 Dan S. Cross. All rights reserved.

comments powered by Disqus

Search the Resource Center

Stay Connected

Email Newsletter Signup

Want to get connected? Sign up to receive regular news, polls and updates from The Kauffman Foundation.

Email Newsletters

Want to be up-to-date with the latest news and updates from Entrepreneurship.org? To subscribe, just give us your email address below; you'll choose which e-newsletters you'd like to receive on the next screen.