Contingent Workers


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Contingent Workers

  1. 1. Avoiding Legal Landmines When Using Contractors & Other Contingent Workers Leila S. Narvid Payne & Fears LLP
  2. 2. Goals: <ul><li>What are the various categories of contingent worker arrangements? </li></ul><ul><li>What are the consequences of misclassifying employees as independent contractors? </li></ul><ul><li>What are the legal standards for determining employee/independent contractor relationship? </li></ul><ul><li>What are the legal standards for determining whether an employment or joint employment relationship exists? </li></ul>
  3. 3. <ul><li>According to the U.S. Department of Labor, Bureau of Labor Statistics, 5.7 million workers were classified as contingent in February 2005. Contingent work is now present in virtually every sector of the economy. </li></ul>
  4. 4. Healthcare Contingent Workers <ul><li>More than 25 % of those workers were employed in health services with the next closest sector (professional) making up 18%. </li></ul><ul><li>Healthcare contingent workers, by percentage, make up more than manufacturing, retail, transportation, and hospitality combined. </li></ul>
  5. 5. What are the advantages and disadvantages of using contingent workers? <ul><li>Advantages: </li></ul><ul><li>- Flexibility in type and amount of labor resources; can address staffing gaps </li></ul><ul><li>Savings in benefits and taxes </li></ul><ul><li>Immediate access to expertise not present internally </li></ul><ul><li>Savings in long-term compensation and costs </li></ul>
  6. 6. Disadvantages: <ul><li>Loyalty to employer/high turnover rate </li></ul><ul><li>Lack of integration into workplace culture </li></ul><ul><li>Cost of training </li></ul><ul><li>May be less familiar with health care organization’s overall structure, policies, practices, and personnel </li></ul><ul><li>Higher risk for work-related injury. For example, the rate of needle-stick injuries among temporary nurses caring for AIDS patients in 11 U.S. hospitals was 1.65 times higher than the rate for staff nurses working in the same units. </li></ul>
  7. 7. Independent Contractors Determine whether a worker is an employee or independent contractor! DLSE starts with the presumption that the worker is an employee. (CA Labor Code § 3357.)
  8. 8. Temporary Employees <ul><li>Staffing firms recruit, screen, and hire individuals who are then placed with client companies on either a temporary or project-specific basis. </li></ul><ul><li>Staffing firms typically train, set wages, and provide workers’ compensation coverage. </li></ul><ul><li>The client company controls the employees’ work during the assignment. </li></ul>
  9. 9. Employee Leasing/Professional Employment Organizations <ul><li>Professional Employer Organization (PEO) </li></ul><ul><ul><li>“ hires” the employees </li></ul></ul><ul><ul><li>handles all aspects of employee administration </li></ul></ul><ul><li>The employees are “leased” to the company client and perform their regular job duties under the company’s supervision and direction. </li></ul><ul><li>The PEO typically does not recruit or hire employees itself. </li></ul>
  10. 10. Consequences of Misclassifying Employees and Independent Contractors
  11. 11. Consequences of Misclassifying Employees and Independent Contractors <ul><li>Back taxes </li></ul><ul><li>Interest </li></ul><ul><li>Penalties to the IRS </li></ul><ul><li>Back pay </li></ul><ul><li>Front pay </li></ul><ul><li>Litigation expenses </li></ul><ul><li>Attorney’s Fees </li></ul>
  12. 12. Legal Standards for Determining Employee/Independent Contractor Relationship
  13. 13. <ul><li>“ Economic Realities” test </li></ul><ul><li>IRS “20 Factor” test </li></ul><ul><li>Common Law Agency test </li></ul><ul><li>FLSA “Economic Realities” test </li></ul><ul><li>Hybrid test </li></ul>More than Just One Test…
  14. 14. “ Economic Realities” Test <ul><li>Does the company have control over the worker? </li></ul><ul><li>Consider : </li></ul><ul><li>Is the person engaged in an occupation or business distinct from that of the company? </li></ul><ul><li>Is the work part of the regular business of the company? </li></ul><ul><li>Does the company supply the instrumentalities, tools, and place for the person performing the work? </li></ul><ul><li>What is the person’s investment in the equipment or materials required to perform the work, or the person’s use of assistants? </li></ul>
  15. 15. “ Economic Realities” Test (cont’d) <ul><li>Does the service performed require a special skill? </li></ul><ul><li>What is the person’s opportunity for profit or loss </li></ul><ul><li>depending on his or her managerial skill? </li></ul><ul><li>What is the length of time for which the services are to be performed? </li></ul><ul><li>What is the degree of permanence of the working relationship? </li></ul><ul><li>What is the method of payment? </li></ul><ul><li>Do the parties believe that they are creating an employer-employee relationship? </li></ul>
  16. 16. Example of Application of Economic Realities Test <ul><li>Even where there is an absence of control over work details, there can still be an employment relationship if: </li></ul><ul><li>The company retains pervasive control over the operation as a whole; </li></ul><ul><li>The worker’s duties are an integral part of the operation; and </li></ul><ul><li>The nature of the work makes detailed control unnecessary </li></ul><ul><li>Yellow Cab Cooperative v. Workers Compensation Appeals Board </li></ul><ul><li>(1991) 226 Cal.App.3d 1288 </li></ul>
  17. 17. Don’t fall into the trap… <ul><li>The existence of a written agreement purporting to establish an independent contractor relationship is not determinative. </li></ul><ul><li>The fact that a worker is issued a Form 1099 rather than a W-2 form is also not determinative. </li></ul>
  18. 18. IRS “20 Factor” Test Who has control over the work being done?
  19. 19. IRS “20 Factor” test (cont’d) <ul><li>Comply with instructions - when, where and how the labor be performed? </li></ul><ul><li>The company trains the worker </li></ul><ul><ul><li>including requiring an experienced employee to work with the worker; </li></ul></ul><ul><ul><li>corresponding with the worker; or </li></ul></ul><ul><ul><li>requiring the worker to attend meetings. </li></ul></ul><ul><li>The labor or services performed by the worker are integrated into the business operations of the company. </li></ul><ul><li>The company is concerned about the methods used to accomplish the work as well as the results if the worker must render the labor or services personally. </li></ul><ul><li>The company hires, supervises and pays assistants, as opposed to the worker hiring, supervising and paying other assistants, pursuant to a contract under which the worker is responsible for providing materials and labor and for the attainment of a result. </li></ul>
  20. 20. IRS “20 Factor” test (cont’d) <ul><li>The worker and the company have a continuing relationship. A continuing relationship may exist even when work is performed at frequently recurring, although regular, intervals. </li></ul><ul><li>The company establishes set hours of work. </li></ul><ul><li>The worker must devote substantially full time to the company, and the company has control over the amount of time the worker spends working and may restrict the worker from doing other gainful work. </li></ul><ul><li>The labor or services are performed on the premises of the company, especially if the work could be done elsewhere. </li></ul><ul><li>The worker must perform labor or services in the order or sequence set by the company, indicating that the worker is not free to follow the worker’s own pattern of work but must follow the established routines and schedules of the company. </li></ul>
  21. 21. IRS “20 Factor” test (cont’d) <ul><li>The worker is required to submit to the company regular or written reports about the status of the work being performed. </li></ul><ul><li>The worker is paid by the hour, week or month, provided that this method of payment is not merely a convenient way of paying a lump sum agreed upon as the cost of a particular job. </li></ul><ul><li>The company ordinarily pays the worker’s business or traveling expenses because the company, to control expenses, generally retains the right to regulate and direct the worker’s business activities. </li></ul><ul><li>The company furnishes significant tools, materials and other equipment to the worker. </li></ul><ul><li>The worker does not invest in facilities that are used by the worker in performing labor or services and that are not typically maintained by a worker, such as the maintenance of an office. </li></ul>
  22. 22. Common Law Agency Test <ul><li>Courts look at: </li></ul><ul><li>the skill required </li></ul><ul><li>The source of the instrumentalities and tools </li></ul><ul><li>The location of the work </li></ul><ul><li>The duration of the relationship between the parties </li></ul><ul><li>Whether the hiring party has the right to assign additional projects to the worker </li></ul><ul><li>The extent of the worker’s discretion over when and how long to work </li></ul>
  23. 23. Common Law Agency Test (cont’d) <ul><li>The method of payment </li></ul><ul><li>The worker’s role in hiring and paying assistants </li></ul><ul><li>Whether the work is part of the regular business of the hiring party </li></ul><ul><li>Whether the hiring party is in business </li></ul><ul><li>The provisions of employee benefits </li></ul><ul><li>The tax treatment of the hired party </li></ul><ul><li>Nationwide Mutual Ins. V. Darden (1992) 503 U.S. 318 </li></ul>
  24. 24. FLSA - Economic Realities Test Employee status depends on the circumstances of the work relationship, and no one factor is dispositive. What is the “true economic reality” of the employment relationship? Carter v. Dutchess Community College (2d Cir. 1984) 735 F.2d 8
  25. 25. Hybrid Test <ul><li>Economic realities + common law agency principles + hiring party’s right and capacity to control the worker </li></ul>
  26. 26. Examples: Employee or Independent Contractor? <ul><li>Acme Corp. tells worker that she is an independent contractor and not an employee. </li></ul><ul><li>Acme does not make any payroll deductions or withholdings for taxes, social security, etc., when it pays worker, and at the end of the year Acme provides worker with an IRS form 1099 rather than a W-2. </li></ul><ul><li>By paying worker in this manner does it mean worker is automatically an independent contractor? </li></ul>
  27. 27. Examples (cont’d) <ul><li>Courier industry: historically has used i ndependent contractor, or independent owner-operator driver, business model </li></ul><ul><li>Drivers independent contractors or employees? </li></ul>
  28. 28. Statutes that Address Joint Employment Situations <ul><li>Federal: </li></ul><ul><li>Compensation & Benefits (ERISA, FLSA, Equal Pay Act) </li></ul><ul><li>Discrimination (Title VII, E.O. 11246, ADA, ADEA) </li></ul><ul><li>Labor laws (NLRA, IRCA, FMLA, WARN) </li></ul>
  29. 29. Discrimination <ul><li>EEOC - clients and contingent worker providers may be jointly liable for violating the rights of contingent workers under Title VII, the ADEA, the EPA, or the ADA </li></ul>
  30. 30. Case Study <ul><li>A temporary employment agency assigned Jane to a temporary job as a hospital aide. Jane also discovered that the agency had also assigned a male to a temporary job as an “orderly” at the same hospital at a higher wage. Jane files charges against the agency and the hospital, alleging that her job and that the of the male orderly were substantially equal, and that the wage disparity violated the Equal Pay Act and Title VII. Jane’s charges against the hospital also challenges a disparity between her wages and those of permanent male aides and orderlies at the hospital. </li></ul>
  31. 31. Case Study, cont. <ul><li>Which entity is liable? The agency, the hospital, or both? </li></ul><ul><li>Temporary employment agency and the hospital were joint employers of Jane; both entities had control over the rates of pay for the hospital aide and orderly jobs. </li></ul><ul><li>If the temporary aide and orderly jobs were substantially equal under Equal Pay Act standards, both the agency and the hospital are liable under the EPA and Title VII on the claim that Jane and the orderly should have received the same wage. </li></ul>
  32. 32. Case Study, cont. <ul><li>Assume an investigation determines that the wage differential between the temporary and permanent aide and orderly jobs was based on a factor other than sex, since the hospital paid all its temporary workers less than permanent workers filling the same jobs, regardless of sex. </li></ul><ul><li>In that case, no cause is found on the EPA/Title VII claim. </li></ul>
  33. 33. Wages & Hours <ul><li>DOL regulations offer specific criteria describing when joint employment relations may exist: </li></ul><ul><li>There is an arrangement between the employers to share the employee’s services </li></ul><ul><li>One employer is acting in the interest of another employer in relation to the employee </li></ul><ul><li>The employer may be “deemed to share control” of the employee </li></ul>
  34. 34. FMLA <ul><li>Two or more employers may be joint employers where each exercises some control over the working conditions of the employee. </li></ul><ul><li>Joint employment typically found to exist when a temporary or leasing agency supplied employees to a second employer. </li></ul>
  35. 35. Occupational Safety and Health <ul><li>Who created the workplace hazard and supervised the injured worker? </li></ul>
  36. 36. Labor Relations <ul><li>NLRA guarantees rights of private sector workers to unionize. It does not cover independent contractors. </li></ul><ul><li>H.S. Care LLC, dba Oakwood Care Center (2004) 343 NLRB No. 76 </li></ul>
  37. 37. Employee Benefits <ul><li>Employers must include leased employees in their employee headcounts to determine if their benefits plans qualify for favorable tax treatment under the Internal Revenue Code’s coverage and non-discrimination tests. </li></ul>
  38. 38. Employment Taxes <ul><li>Which entity is responsible for paying the worker? </li></ul>
  39. 39. Employment Taxes Case Study <ul><li>In re Critical Care Support Services, Inc., 138 B.R. 378 (Bankr. E.D.N.Y. 1992) – bankrupt provider of nursing services to hospitals held solely responsible for employment of nurses; provider firm billed hospitals for services and then paid wages and benefits of nurses. </li></ul>
  40. 40. Immigration <ul><li>Immigration Reform and Control Act (IRCA) </li></ul><ul><li>DOL - Companies that receive contingent workers excluded from definition of employer </li></ul>
  41. 41. Examples - Joint Employment Situations <ul><li>IT consultant is a W-2 employee of a technology services firm, IT Corp. </li></ul><ul><li>Has a written “at-will” employment agreement with IT Corp. </li></ul><ul><li>Receives salary, health care benefits, 401k, and other benefits from the firm. </li></ul><ul><li>About 75% of her work is performed at Acme Hospital, one of IT Corp.’s clients. She uses Acme equipment almost daily; has an Acme e-mail address; her direct supervisors are Acme employees; she is physically located at Acme Hospital’s premises almost every day. </li></ul><ul><li>Who is the employer? </li></ul>
  42. 42. Practical Tips <ul><li>- Conduct a proper analysis when classifying workers as independent contractor vs. employee; don’t just make assumptions. </li></ul><ul><li>- You may not always know the answer. Understand the risks of misclassification, and weigh the risks. </li></ul><ul><li>- Have a written agreement with independent contractors. An agreement by itself is not enough to make a worker an independent contractor, but it will help show government agencies that both the employer and the worker intend to create a client-independent contractor relationship. </li></ul><ul><li>- Select reputable and solvent contingent worker provider firms. </li></ul>
  43. 43. Practical Tips (cont’d) <ul><li>- Contract with firm should provide for indemnification, so that firm is responsible for legal fees and costs that may be incurred in defense of cases stemming from the firm’s noncompliance. </li></ul><ul><li>- Give copies of equal employment opportunity, sexual harassment, and grievance policies to temporary or leased workers. Treat any complaint of discrimination from such workers like a regular employee's complaint by investigating promptly, and, if necessary, taking corrective action. </li></ul><ul><li>- Accurately report all overtime to the temporary or leasing firm. </li></ul><ul><li>- Make it clear in employee benefit plans whether contingent workers are covered. </li></ul>