The Contingent Workforce: Employer Expectations and Legal Realities

In another recent U.S. Court of Appeals for the Second Circuit decision involving independent contractors, the court determined that when “ERISA benefits are at issue, the employment status of an individual … is not determined solely by the label used in the contract between the parties.” In Yak v. Bank Brussels Lambert, 252 F.3d 127 (2d Cir. 2001), the plaintiff received administrative rulings from both the Department of Labor and the Internal Revenue Service determining that she was an employee. She then sued Bank Brussels Lambert for a wide variety of benefits she felt she was entitled to based on these rulings. The court stated that the administrative rulings were not conclusive evidence of her employee status for the purpose of receiving these benefits and then remanded the case. On remand, the district court will need to evaluate her status as an employee and the context surrounding the signed release contained in her independent contractor agreement. This ruling suggests that for ERISA purposes, employers should look beyond the “four corners” of the contract and understand the context of the waiver and whether the individual signing it understands what he or she is doing.

Historically, there have been few cases involving law firms being sued by their contingent workers, but there are currently two lawsuits pending in the Los Angeles County Superior Court that involve attorneys. The plaintiffs in these lawsuits include attorneys, paralegals and other support staff who work for Auxiliary Legal Service, Inc. (ALS). This non-profit corporation was created by the County of Los Angeles and the Office of Los Angeles County Counsel (LACC). The plaintiffs in both suits, Shiell v. County of Los Angeles, No. BC208582 (Cal. Super. Ct. filed Apr. 12, 1999), and Holmgren v. County of Los Angeles, No. BC240954 (Cal. Super. Ct. filed Nov. 29, 2000), allege that they are really County employees and thus should receive all of the benefits and pay of County employees. They allege that the County formed ALS in order to employ individuals on a lower pay scale than County employees and avoid paying benefits to these individuals. The plaintiffs further allege that after the County received an advisory opinion from the IRS stating that attorneys employed by the LACC were in fact employees and not independent contractors, the LACC then formed ALS. The plaintiffs also allege that ALS has been solely controlled by LACC, the ALS staff only uses LACC office space, equipment and facilities and the ALS staff appearing in court are recognized as “County Counsel.” These lawsuits demonstrate that the legal field is not immune from these types of suits, and private practice firms could face similar problems if they employ contingent workers in a comparable situation.

The above cases illustrate how costly misclassifying workers can be to an employer in terms of litigation and settlement costs. But in addition to misclassification problems creating employee benefit issues, employers who utilize contingent workers often do not recognize that they may face liability under “joint employer” liability. Under the joint employer theory, the employee leasing company or temporary agency is found to be an employer of the contingent worker, but the employer for whom services are performed is considered a second, “joint” employer, and is therefore also liable for any employment-related issues. For example, if a contingent worker's employment is terminated, both the temporary agency and the client law firm may be held liable under the discrimination laws. Joint employer liability is imposed on employers utilizing contingent workers because, in most cases, the client law firm is responsible for supervising, controlling, disciplining and delegating work to the contingent worker. As a result, the client law firm is found to be tantamount to the contingent worker's actual employer, even if the temporary agency or leasing company is paying the worker in question and providing the worker with employee benefits.

On a more technical note, the use of contingent workers may have implications for law firms under both the Internal Revenue Code and under state workers' compensation law.

Under the Internal Revenue Code, for example, a specific definition is created for “leased” employees. To be a “leased employee,” three requirements must be met: 1) the individual must provide services under an agreement between a leasing company and a contracting employer, 2) such services must be performed on a substantially full-time basis for more than a year, and 3) such services are of a type historically performed by the contracting employer's employees. The requirement that the contingent worker perform services for more than a year can obviously blur the distinction between a so-called temporary employee and a leased employee, as defined by the Code. The leased employee definition is significant for employee benefit purposes because the Code requires that leased employees be included by employers for formulaic coverage and non-discrimination testing.

States also have their own say in the workers' compensation area. For example, Massachusetts workers compensation law creates a statutory differentiation between leasing companies and temporary agencies on the one hand, and contracting employers on the other. The statute provides that, unless the parties contract otherwise, workers compensation coverage (and, therefore, protection from lawsuits) remains with the temporary agency or leasing company. As a result, unless the client law firm specifically agrees with a leasing company or temporary agency, an employer will not be able to cover a temporary employee or leased employee under its workers' compensation policy, and gain the protection of the workers' compensation ban from lawsuits.

Fortunately, there are affirmative steps law firms can take to avoid, or at least minimize, potential liability for the use of contingent workers. In the independent contractor area, law firms should scrutinize their use of independent contractors and insist that any independent contractor relationship be documented by a standard independent or consulting agreement between the individual in question and the firm. Employers do not withhold taxes from sums paid to independent contractors or make statutory (eg, FICA) payments on their behalf, and as a result substantial tax issues can arise if independent contractors have been misclassified. Once the relationship begins, the law firm should monitor the relationship to ensure that both firm management and the independent contractor are acting appropriately. So, for example, the law firm should ensure that the independent contractor is working for a limited duration, is not being controlled by the firm's managers in the performance of his or her duties, and that the contractor has continued to engage in an independent business from those services performed for the law firm.

In its relationships with temporary agencies or leasing companies, an employer should ensure that there is a written agreement in place between the agency or leasing company. Such agreements should provide, at a minimum, adequate protection (for example, a broad indemnification and insurance obligation on the part of the agency) for joint employer liability issues.

Finally, law firms should conduct internal evaluations of their own practices and documents. To begin with, firms should review the classifications in which they place workers, review all employee benefit plan documents, and employee benefit plan procedures (eg, the claims procedure under any ERISA-qualified plan) and, as stated above, all independent contractor agreements.

While the foregoing steps will not completely insulate any law firm from potential liability, taking the measures outlined above will certainly minimize potential risk in this quickly-developing area of the contingent workforce.

Christopher Perry is vice chair of the Labor and Employment Department at Hale and Dorr LLP in Boston, MA. His practice involves litigation of employment cases in state and federal courts, and he has handled cases of discrimination, wrongful termination, and ERISA claims.

Part 2 of 2

Part 1 of this article outlined the different categories of contingent workers. In Part 2, the author outlines the ramifications of misclassifying contingent workers, both in case law and for the IRS.

When individuals are not considered to be employees, employers are often insulated from various discrimination suits. While this is not the main reason an employer hires contingent workers, it can be an added benefit. However, just as it is important to classify individuals properly for benefit and tax purposes, law firms also need to classify individuals properly to ensure they understand the possible discrimination issues up front and will not be unwittingly blind-sided by someone whom they thought was a contingent worker, but who is subsequently determined to be an employee. The U.S. Court of Appeals for the Second Circuit held in Eisenberg v. Advance Relocation & Storage, Inc. , 237 F.3d 111 (2d Cir. 2000), that when determining whether a worker is an employee for Title VII purposes, the analysis needs to focus on the “extent to which the hiring party controls the manner and means by which the worker completes [his or] her assigned tasks, and not on how [he or] she is treated for tax purposes or whether [he or] she receives benefits.” The factors used by the court were derived from the 13 factors set forth in the U.S. Supreme Court case, Community for Creative Non-Violence v. Reid, 490 U.S. 730 (1989). The court in Eisenberg focused on how the “anti-discrimination laws were not intended to be skirted by the terms of individual employment contracts.”

In another recent U.S. Court of Appeals for the Second Circuit decision involving independent contractors, the court determined that when “ERISA benefits are at issue, the employment status of an individual … is not determined solely by the label used in the contract between the parties.” In Yak v. Bank Brussels Lambert , 252 F.3d 127 (2d Cir. 2001), the plaintiff received administrative rulings from both the Department of Labor and the Internal Revenue Service determining that she was an employee. She then sued Bank Brussels Lambert for a wide variety of benefits she felt she was entitled to based on these rulings. The court stated that the administrative rulings were not conclusive evidence of her employee status for the purpose of receiving these benefits and then remanded the case. On remand, the district court will need to evaluate her status as an employee and the context surrounding the signed release contained in her independent contractor agreement. This ruling suggests that for ERISA purposes, employers should look beyond the “four corners” of the contract and understand the context of the waiver and whether the individual signing it understands what he or she is doing.

Historically, there have been few cases involving law firms being sued by their contingent workers, but there are currently two lawsuits pending in the Los Angeles County Superior Court that involve attorneys. The plaintiffs in these lawsuits include attorneys, paralegals and other support staff who work for Auxiliary Legal Service, Inc. (ALS). This non-profit corporation was created by the County of Los Angeles and the Office of Los Angeles County Counsel (LACC). The plaintiffs in both suits, Shiell v. County of Los Angeles, No. BC208582 (Cal. Super. Ct. filed Apr. 12, 1999), and Holmgren v. County of Los Angeles, No. BC240954 (Cal. Super. Ct. filed Nov. 29, 2000), allege that they are really County employees and thus should receive all of the benefits and pay of County employees. They allege that the County formed ALS in order to employ individuals on a lower pay scale than County employees and avoid paying benefits to these individuals. The plaintiffs further allege that after the County received an advisory opinion from the IRS stating that attorneys employed by the LACC were in fact employees and not independent contractors, the LACC then formed ALS. The plaintiffs also allege that ALS has been solely controlled by LACC, the ALS staff only uses LACC office space, equipment and facilities and the ALS staff appearing in court are recognized as “County Counsel.” These lawsuits demonstrate that the legal field is not immune from these types of suits, and private practice firms could face similar problems if they employ contingent workers in a comparable situation.

The above cases illustrate how costly misclassifying workers can be to an employer in terms of litigation and settlement costs. But in addition to misclassification problems creating employee benefit issues, employers who utilize contingent workers often do not recognize that they may face liability under “joint employer” liability. Under the joint employer theory, the employee leasing company or temporary agency is found to be an employer of the contingent worker, but the employer for whom services are performed is considered a second, “joint” employer, and is therefore also liable for any employment-related issues. For example, if a contingent worker's employment is terminated, both the temporary agency and the client law firm may be held liable under the discrimination laws. Joint employer liability is imposed on employers utilizing contingent workers because, in most cases, the client law firm is responsible for supervising, controlling, disciplining and delegating work to the contingent worker. As a result, the client law firm is found to be tantamount to the contingent worker's actual employer, even if the temporary agency or leasing company is paying the worker in question and providing the worker with employee benefits.

On a more technical note, the use of contingent workers may have implications for law firms under both the Internal Revenue Code and under state workers' compensation law.

Under the Internal Revenue Code, for example, a specific definition is created for “leased” employees. To be a “leased employee,” three requirements must be met: 1) the individual must provide services under an agreement between a leasing company and a contracting employer, 2) such services must be performed on a substantially full-time basis for more than a year, and 3) such services are of a type historically performed by the contracting employer's employees. The requirement that the contingent worker perform services for more than a year can obviously blur the distinction between a so-called temporary employee and a leased employee, as defined by the Code. The leased employee definition is significant for employee benefit purposes because the Code requires that leased employees be included by employers for formulaic coverage and non-discrimination testing.

States also have their own say in the workers' compensation area. For example, Massachusetts workers compensation law creates a statutory differentiation between leasing companies and temporary agencies on the one hand, and contracting employers on the other. The statute provides that, unless the parties contract otherwise, workers compensation coverage (and, therefore, protection from lawsuits) remains with the temporary agency or leasing company. As a result, unless the client law firm specifically agrees with a leasing company or temporary agency, an employer will not be able to cover a temporary employee or leased employee under its workers' compensation policy, and gain the protection of the workers' compensation ban from lawsuits.

Fortunately, there are affirmative steps law firms can take to avoid, or at least minimize, potential liability for the use of contingent workers. In the independent contractor area, law firms should scrutinize their use of independent contractors and insist that any independent contractor relationship be documented by a standard independent or consulting agreement between the individual in question and the firm. Employers do not withhold taxes from sums paid to independent contractors or make statutory (eg, FICA) payments on their behalf, and as a result substantial tax issues can arise if independent contractors have been misclassified. Once the relationship begins, the law firm should monitor the relationship to ensure that both firm management and the independent contractor are acting appropriately. So, for example, the law firm should ensure that the independent contractor is working for a limited duration, is not being controlled by the firm's managers in the performance of his or her duties, and that the contractor has continued to engage in an independent business from those services performed for the law firm.

In its relationships with temporary agencies or leasing companies, an employer should ensure that there is a written agreement in place between the agency or leasing company. Such agreements should provide, at a minimum, adequate protection (for example, a broad indemnification and insurance obligation on the part of the agency) for joint employer liability issues.

Finally, law firms should conduct internal evaluations of their own practices and documents. To begin with, firms should review the classifications in which they place workers, review all employee benefit plan documents, and employee benefit plan procedures (eg, the claims procedure under any ERISA-qualified plan) and, as stated above, all independent contractor agreements.

While the foregoing steps will not completely insulate any law firm from potential liability, taking the measures outlined above will certainly minimize potential risk in this quickly-developing area of the contingent workforce.

Christopher Perry is vice chair of the Labor and Employment Department at Hale and Dorr LLP in Boston, MA. His practice involves litigation of employment cases in state and federal courts, and he has handled cases of discrimination, wrongful termination, and ERISA claims.