Managing “Joint Employment” or “Co-Employment” Risk

by Mark Zisholtz, Vice President, Workforce Management and Compliance Solutions at HireGenics


Note from the Editor-in-Chief:  When we began planning the initial articles for this blog, I wanted to address a practical topic that would help procurement professionals and their supply chain partners better understand a risk area that tends to be mismanaged or misunderstood: the “joint employment” or, as it is commonly referred to in this industry, the “co-employment” of contingent workers (“joint employment” is a legal term that is widely used to describe most types of co-employment relationships and, for purposes of this article, it is sufficient to assume that “joint employment” and “co-employment” mean the same thing). 

All too often I hear procurement professionals mention “co-employment” and, in the same breath, point out that their supply chain partner was handling or mitigating this issue.  However, many of these supply chain partners are not doing enough, either because they do not truly understand the risk or the law, or they do not commit the resources to execute an effective management strategy.  Hence, end customers do not know how much risk they actually face.  Therefore, I decided to write this article, a primer on managing joint employment or co-employment risk, to launch this contingent workforce blog.   


Introduction

“Joint employment” means that a worker is employed by two or more employers at the same time.  Stated differently, if two independently operating entities jointly exercise enough of the attributes of an employer with respect to a particular worker, both of those entities will be considered joint employers of that worker for purposes of various employment laws.

In the indirect workforce industry, “joint employment” is an ongoing existential dilemma.  Workers who are employed as W-2 employees by a supply chain partner and assigned to perform services for an end customer are, in many cases, “jointly employed” by the supply chain partner, on the one hand, and the end customer, on the other hand (these workers shall, for purposes of this blog article, collectively be referred to as “On-Site W-2 Contingent Workers”)[1].  Neither the size of the supply chain partner, the status of the partner as a prime or sub, nor whether the partner provides services through an MSP or other outsourced workforce manager, matters for purposes of this analysis.  Yet, the end customer rarely wants to deal with the inevitable fallout of a joint employment determination because it undermines the very nature of a viable long term contingent workforce strategy.

If joint employment exists, then both joint employers are responsible for resulting liability under various employment laws, such as the Fair Labor Standards Act (covers wage and hour violations)(“FLSA”) and Title VII of the Civil Rights Act of 1964 (covers discrimination and retaliation on the basis of race, color, religion, sex, or national origin)(“Title VII”).[2]  By way of contrast and as a means to highlight the impact of a joint employment relationship, if an On-Site W-2 Contingent Worker were not deemed to be jointly employed by the end customer, those various employment laws, such as the FLSA and Title VII, would not apply to the end customer with respect to that worker.[3]

How do Joint Employment Claims Typically Arise?

Typically, within an indirect workforce relationship, joint employment claims arise:

  • On-Site W-2 Contingent Worker becomes aggrieved. For example, a white supervisor employed by the end customer allegedly makes racially insensitive remarks to a minority On-Site W-2 Contingent Worker or gives that worker less favorable work assignments.  Or, an On-Site W-2 Contingent Worker feels disenfranchised because he/she does not have the same entitlement to vacation or health benefits as employees of the end customer even though the On-Site W-2 Contingent Worker is working side-by-side and doing essentially the same work as those employees.

Note: The key take-away is that the grievance is caused or perceived to have been caused on the end customer side and it may have nothing to do with the supply chain partner.  

  • On-Site W-2 Contingent Worker usually connects with an attorney and claims the end customer is his/her employer. For example, the end customer’s manager requires the On-Site W-2 Contingent Worker to work overtime on a regular basis but allegedly directs or pressures that worker to submit time cards which undercount the number of hours actually worked.  If the end customer meets the definition of a “joint employer” under the FLSA, then the end customer could be liable for not properly paying overtime, including penalties and fines.[4]  A plaintiff’s attorney will make monetary demands or may threaten to investigate the potential for a larger legal action, such as a class action.  It is no secret that in many cases the end customer has deeper pockets than its supply chain partners.  Or, the worker may alert the Department of Labor of the alleged wrongdoing which could lead to an audit of the end customer and/or the supply chain partner.  The potential claim pressures the relationship between the end customer and the supply chain partner.

Note: the key take-away is that end customers do not want legal noise (or potential liability), end customers may directly or indirectly pressure their supply chain partner to ‘make the problem go away’, supply chain partners do not want to pay settlements that cut into their margins (especially payroll providers who generally operate on thin margins), and smaller supply chain partners may find it difficult to pay settlements because they may not have adequate or abundant resources.   

The Mistaken Belief that an Indemnification Clause is the Saving Grace

Most end customers believe that an indemnification clause contained in an MSA with their supply chain partner provides full protection against any claims.  In other words, if a worker files a claim then the end customer will not be held responsible.  However, indemnification clauses are not a panacea.

Indemnification clauses are required to be written “clearly” and “unequivocally”, and it is not uncommon to see clauses which do not meet this standard.  For example, many such clauses contain words of general import purporting to require indemnification for “any and all liability”, but courts may not enforce this language because they do not consider it to be “clear” and “unequivocal”.  Further, a reasonably prudent business partner will or should outright reject or at least negotiate such broad language in an indemnification clause, thus setting a negative tone at the outset of the relationship.

Courts have also created many public policy exceptions to indemnification clauses.  For example, many courts will not enforce such clauses if the party seeking indemnification is 50% or greater negligent (courts may use different percentages of liability, depending on the jurisdiction), if the party seeking to enforce the provision knew of or permitted the negligent acts to occur even if the party did not commit the negligent act themselves, or if the party seeking enforcement acted fraudulently, intentionally, or with willful misconduct.

Most end customers also forget that while an indemnification clause may operate to shift monetary liability, it may not or cannot shift non-monetary judgments.  For example, an end customer may be required to provide sensitivity training or implement new employment policies and procedures regardless of the presence of an indemnification clause.

And finally, even if an end customer has an enforceable indemnification clause in place and seeks to enforce it, the party who promised to provide the indemnification must be able or willing to honor it.  For example, a small supplier may not have the financial wherewithal to provide indemnification.  Or, an end customer may have to go through the time and expense of trying to enforce an indemnification clause if the party providing indemnification refuses to honor it.

A Quick Look at How Courts Determine Whether Joint Employment Exists

For purposes of this blog article, I will set forth the factors of the FLSA joint employment test.  Because of the circular and expansive definition used by the FLSA (i.e., an “employee” is “any individual employed by an employer”), that test contains the broadest definition of joint employment.

Following are the most common joint employment factors used by courts for purposes of the FLSA, along with comments to help illustrate those factors:

Factor #1. The alleged employer’s authority to hire and fire the relevant employees.

Comments: The authority to hire and fire has been interpreted to also include individuals who play an “important role” in the hiring and firing process.  An “important role” has been interpreted to include conducting interviews and consulting on hiring and firing decisions.  Further, in one case, an end customer was deemed to be a joint employer in part on the basis that a significant number of workers testified that the end customer manager informed those workers of hiring and firing decisions even though the supplier actually made the hiring and firing decisions.

Bottom line: ultimate control over hiring and firing decisions is not required to meet Factor #1, and to the extent that an end customer manager plays an “important role” in hiring and firing decisions, the FLSA may apply to the end customer.

Factor #2. The alleged employer’s authority to promulgate work rules and assignments and to set the employees’ conditions of employment: compensation, benefits, and work schedules, including the rate and method of payment.

Comments: Setting the conditions of employment includes assisting workers with job-related concerns and issues, training, communicating employee policy information, such as the requirements of an employee dress code (including alerting those workers about repercussions for failing to adhere to such policy information, such as a fine for violating the dress code), and setting vacation schedules.

Bottom line: the end customer should not be doing any of these things with respect to On-Site W-2 Contingent Workers if it wants to mitigate the risk of a joint employment determination.

Factor #3. The alleged employer’s involvement in day-to-day employee supervision, including employee discipline.

Comments: Extensive involvement in day-to-day employee supervision includes requiring workers to report to the end customer’s manager, instructing those workers about the job’s requirements and duties, monitoring the employees’ performance and imposing discipline (including occasionally terminating employees), and even having the authority to recommend that employees be disciplined even if that recommendation is not followed.

Bottom line: the end customer needs to tread carefully here and limit day-to-day supervision to the extent possible.

Factor #4. The alleged employer’s actual control of employee records, such as payroll, insurance, or taxes.

Comments: Actual control does not mean that an end customer cannot contractually obtain the right to inspect the books and records of a supply chain partner for bona fide purposes – e.g., to ensure that the supply chain partner is requiring its workers to sign work product assignment provisions in favor of the end customer.

Note: The 4 factors discussed above do not constitute an exhaustive list of all potentially relevant factors and should not be blindly applied.  That is, the 4 factors listed above do not necessarily comprise the sole considerations that enter into a determination of joint employer status under the FLSA.  Other indicia of significant control may be considered.  For example, additional factors such as the corporate structure and nature of the business in which the parties engage have been considered by courts.

Best Practices

The relationship between the On-Site W-2 Contingent Worker and the end customer needs to be managed properly.  Depending on whether the end customer and supply chain partner embrace or accept joint employment but seek to mitigate risk within that relationship, or if the end customer and the supply chain partner desire to avoid a joint employment relationship entirely, the following best practices will provide a guide to help achieve those goals:

  • Require supply chain partners to push proper legal provisions down to the On-Site W-2 Contingent Worker. Examples: restrictive covenants (but not non-compete because non-competes evidence an employment relationship), work-for-hire provisions in favor of the end customer, etc.
  • Appropriate supply chain partner (e.g., payroll provider) maintains regular communication with end customer’s engagement/hiring/project manager to identify issues early and resolve them. This is a critical part of any risk mitigation strategy.
  • The on-site presence of a supply chain partner can dramatically reduce claims if such presence is used properly. For example, an on-site payroll provider representative should consider holding quarterly luncheons with payrollees to remind them that they are employed by the payroll provider and to use this as an opportunity to individually ferret out any unknown, brewing issues.  Further, for those supplier chain partners charged with the responsibility of avoiding a joint employment relationship entirely, this would be a good time for the supply chain partner’s representative to specifically remind W-2 On-Site Contingent Workers to address all employment issues with the supplier chain partner and not with the end customer (this reminder should be given on a regular basis) unless, of course, in the case of an emergency or urgent situation.
  • The end customer should maintain a safe work site to minimize worker’s compensation claims.
  • The supply chain partner should perform all HR, payroll and administrative tasks for On-Site W-2 Contingent Workers, such as:
    • Withhold employment taxes.
    • Provide required insurance, such as worker’s compensation insurance.
    • Pay into required funds, such as an applicable state unemployment insurance fund.
    • Issue paychecks (pay stubs should identify the supply chain partner as the employer).
    • Perform background/reference checks.
    • Get W-4s filled out.
    • Run all such employees through the I-9 process.
    • Require all such employees to fill out employment applications.
  • On-Site W-2 Contingent Workers should be given the supply chain partner’s employment handbook (or other applicable policies and procedures), and such worker should sign an acknowledgment form. Note: in most situations, the policies and programs of the end customer differ than the supply chain partner.  For example, an end customer will almost always have a different benefit program for its employees.  In these situations, the supply chain partner should take extra care to emphasize that the end customer’s policies and programs do not apply to the On-Site W-2 Contingent Worker, and that such worker will not become eligible to participate in or benefit from any of these policies or programs while employed by the supply chain partner.  To the extent that the end customer wants On-Site W-2 Contingent Workers to follow a certain limited set of rules, such as hours of work or a particular dress code, the end customer should enter into an agreement with the supply chain partner which describes these rules.  It is then incumbent on the partner to notify its On-Site W-2 Contingent Workers of these rules, and to enforce these rules.
  • To the extent an end customer and its supply chain partner accept or embrace a joint employment relationship, the best practices listed in the bullet point immediately above become less important (but should still be followed to the extent possible).  However, in all cases the end customer’s benefit plan language should explicitly exclude On-Site W-2 Contingent Workers (and all other contingent workers).  Note: Companies can explicitly exclude temporary staff and independent contractors in their benefits wording.  Further, any benefits given by the supply chain partner should only be given in the name of such supplier, and not in the name of the end customer.
  • Do not let end customers include On-Site W-2 Contingent Workers in the end customers’ internal employee e-mail distribution groups, employee rosters, or other mailing lists.
  • Give On-Site W-2 Contingent Workers reminders of who the employer is throughout the relationship and at the conclusion of the assignment, along with clear written instructions on how to recontact the supply chain partner.
  • For end customers and supply chain partners who seek to avoid a joint employment determination, to the extent possible it is critical that the supply chain partner be the only entity that assigns the On-Site W-2 Contingent Worker to a position at the end customer; reassigns the worker to a different position or to perform different duties for the end customer; set the pay rates and benefits, if applicable; negotiates the nature of the work, hours, duration of assignment, and working conditions for the worker; maintains general supervisory responsibilities regarding performance, discipline, and complaints; and evaluates performance and provides counseling; and provides training.
  • In addition, for end customers and supply chain partners who seek to avoid a joint employment determination, contact between end customer and the On-Site W-2 Contingent Worker should be minimized wherever possible. For example, if the worker has a complaint about working conditions, the worker should not be directly addressing his/her complaint with the end customer except in the case of an urgent situation.  Instead, the complaint should be addressed by the supply chain partner directly with the end customer.

Conclusion

In many cases, joint employment issues can be caught early in the process simply by maintaining open lines of communication with On-Site W-2 Contingent Workers and their end customer managers, and promptly addressing complaints or concerns.  For those claims that are not identified and resolved early in the process, it becomes increasingly more important for end customers and their supply chain partners to manage the issues and the worker carefully.  While an indemnification clause may provide protection if drafted and used properly, it is not a panacea and the end customer may hold some or all of the liability.  Therefore, it is imperative that end customers choose the right supply chain partner who understands joint employment issues and demonstrates they have the competence to manage those issues and the On-Site W-2 Contingent Workers properly.

* This blog article does not cover all of the nuances in the joint employment relationship, but rather is intended to address some of the more common scenarios and best practices.  In addition, this article does not address commercial insurance coverages that can be used to protect end customers and others in the supply chain.  For further discussion of any of the joint employment issues addressed in this article, please post your comments or contact me.  


[1] This blog article is limited to discussion of the joint employment of W-2 employees who are employed by a supply chain partner, usually a payroll provider or labor supplier, and assigned to perform services on-site at an end customer.

[2] The FLSA applies to all employers; however, Title VII applies to employers with 15 or more employees.

[3] Other causes of action outside of the employee-employer relationship may exist; however, these causes of action are less well known and, comparatively speaking, not commonly used.

[4] Employment statutes do not clearly define the term “employee”.  Perhaps the FLSA uses the most well-known circular definition, literally defining an “employee” as “any individual employed by an employer.”  Notwithstanding, because statutes use different definitions of the term “employee” courts have logically developed different definitions of “joint employment”, effectively meaning that a worker may be deemed jointly employed for purposes of some employment laws but not others.


Legal Disclaimer – The contents of this article are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.

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