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Using Labor Brokers: The Legal Issues

Using Labor Brokers: The Legal Issues was prepared for the Foundation of the Wall and Ceiling Industry by Burr & Forman, Atlanta. This article is a condensed version of the 40-page document, which provides detailed analysis of federal laws. The publication is available from the Foundation for $25; call (703) 534–8300 to order a copy. It is also available to download free from www.awci.org.


This article is published as a public educational service by the Foundation. This article does not provide legal advice, is not a “do it yourself” guide to labor and employment law, is not a substitute for qualified, experienced legal counsel, and does not attempt to address the numerous and unique factual issues that inevitably arise in legal matters.


The use of labor brokers, or temporary employment agencies, as a way to fill employment vacancies has become a common practice in the construction industry. The wall and ceiling industry is no exception. When contractors use labor brokers to provide workers1 on their jobs, a three-party working relationship is created between the labor broker, the labor broker’s client (the contractor)2 and the worker. 3


A labor broker’s services vary from “pure labor subcontracts, to providing ‘employees’ under a variety of arrangements including leasing or assigning its own ‘permanent’ workers to the contractor for the duration of the project, to a co-employment [arrangement].” 4 Many contractors feel that this arrangement is beneficial for a number of reasons.


Advantages. First, the contractor has ready access to additional labor, in many cases skilled labor. Second, the contractor may be able to reduce the cost of carrying steadily increasing health insurance and other benefits associated with permanent employees. Third, the contractor can fill short-term labor needs without concern for administrative overhead (dealing with payroll and employee documentation) or the difficulty of advertising, interviewing and hiring each new employee. Fourth, and probably most significant, is the flexibility that the use of labor brokers provides to their contractor clients. Contractors are able to maintain a core group of trusted employees and choose from the broker’s supply of labor to fill other vacant positions. The workers obtained through the labor broker can be quickly hired to meet project demands or not retained during slow times. 5


Risks. It is important to keep in mind however, that while these tri-party arrangements may be beneficial to the contractor, these agreements may also expose the contractor to unexpected liability. Furthermore, there are obligations that cannot be avoided by the use of a labor broker. This paper discusses the realities of using labor brokers, including addressing some common misconceptions and errors.


Despite the advantages that labor brokers provide to their contractor clients, using labor brokers also has disadvantages. Oftentimes, contractors using labor brokers have the mistaken impression that because they are acquiring workers who already have an employer (the labor broker), they are not “employers” of the workers and have no obligations to them. This is simply not the case.


The fact that these workers already have an employer-employee relationship with the labor broker does not mean the contractor is not considered an employer of the workers as well. In fact, both courts and the statutes regulating employer-employee relations recognize the concept of “joint employers.” In many cases, contractors are a joint employer and owe the same or similar duties to the workers they obtained from the labor broker as they owe to their “regular” employees. More to the point, the contractor may be liable for failure to fulfill those duties and, in some cases, the contractor cannot avoid being liable for failing to ensure that the labor broker fulfilled its duties to the workers.


As will be discussed later, a contractor may try to structure the labor broker agreement to prevent being classified as a “joint employer” for all purposes. If successful, this could relieve the contractor from liability within certain limits and under many statutes. However, there are serious practical obstacles to achieving this kind of protection.


The contractor should keep in mind, however, that there are some obligations a contractor will owe to its acquired workers, regardless of whether the contractor is classified as an employer (or joint employer). There are also obligations that a contractor can reasonably presume will belong solely to the labor broker.


The consequences of entering into an agreement with a labor broker vary greatly depending upon the statutory framework in each state. If a contractor does not conduct a careful analysis of the agreement in light of the relevant state laws, the agreement could expose the contractor to unintended and unexpected liability.


This article will discuss various laws regulating the relationship between an employer and its employees. 6 This paper is not intended to serve as an endorsement for or against the use of labor brokers; rather it is intended solely for the purpose of making contractors who use or are considering using the services of labor brokers aware of the legal issues, including the potential liabilities, and exposing common misconceptions.


Who Is the Worker’s Employer?


Various federal and state statutes regulate the employment relationship between employers and their employees. In regulating the parties’ employment relationships, these statutes impose obligations and liabilities based on the classifications of the parties. Therefore, the obligations and liabilities imposed upon an entity classified as an “employer” may be very different from the obligations and liabilities imposed upon an entity classified as an employee or non-employer. Also, because traditional single-employer, single-employee relationships have been expanded to include other parties, many statutes now recognize the concept of “joint employers.” These laws define “employer” and “joint employer” differently. Therefore, before entering into an agreement with a labor broker, contractors should take a close look at the structure of the agreement and the relevant laws to make sure they will not be unexpectedly classified as an “employer” or “joint employer” and possibly find themselves in violation of state and federal laws applicable to employers.


Labor Broker: A General Definition7. For purposes of this article, a labor broker, also sometimes known as an employee leasing company, is an individual or entity that recruits and hires workers and then sends these workers to its client companies for temporary placements. This paper presumes the following kind of labor broker/contractor client relationship:


The customers of a labor broker typically call in their employment needs on a daily basis, and workers are sent by the broker to fill these needs. After arriving at the contractor’s project, the workers are subject to the direct control and authority of the customer and the customer’s supervisory personnel. The customer has the power to discharge the employee from the daily work assignment and has the ability to refuse to accept a worker sent by the broker. The contractor does not pay the employee directly. Rather, the labor broker pays the employee and includes as part of its charges to the customer amounts to cover its expenses for compensation premiums, social security and other taxes. 8


“Employee” versus “Independent Contractors” 9. For the purposes of virtually all statutes regulating employer-employee relationships, the distinction between an employee and an independent contractor is critical because independent contractors are given far less protection (and companies owe fewer duties to them) than employees. However, the line that separates independent contractors from employees is far from clear. To make this determination, courts generally consider many factors (with control of the employee being the most important). The other factors that courts consider are the type of occupation, the skill required for the occupation; who furnished the equipment used at the place of work; length of time worked; method of payment; how the relationship is terminated; whether annual leave is available; whether work is an integral part of the employer’s business; whether the employer provides retirement benefits; whether the employer pays social security taxes; and the intention of the parties.10


Applying the presumed labor broker/contractor client relationship above to these facts, it might appear that the contractor is not an employer because the worker it acquires is an independent contractor: The work is temporary; the labor broker generally pays the workers; the labor broker generally provides the retirement benefits and pays social security and other taxes. However, other factors lean in favor of a court finding that the worker is an employee. The work is generally not highly specialized, which usually means the worker is an employee; and the contractor has the authority to discharge the worker and can decline to accept the assigned worker. More importantly, while no one factor alone can determine the outcome, control of the worker’s work is an extremely important factor. As the above definition indicates, once the worker leaves the broker and arrives at the client’s place of business, the worker is under the direction and control of the contractor. Thus, it is oftentimes extremely difficult to have a worker received from a labor broker be classified as an “independent contractor.” The reality is, client companies will often be considered “joint employers” of the workers they receive from labor brokers.


State Law Treatment of the Labor Broker/Client Contractor Relationship. Both state and federal law regulate the employee/employer relationship. While federal law tends to be more uniform, laws regarding the employee/employer relationship vary from state to state. Not surprisingly, however, in assessing whether workers acquired from labor brokers are employees of the contractor, most states (those that have not statutorily addressed the issue) apply the common law factors listed above and conclude that both the labor broker and the contractor client are joint employers of the workers. States such as Florida, Maine, Utah, Alabama, Arkansas, California, Iowa, New York, Mississippi, Ohio, South Carolina, and Texas have all, either by statute or case law, addressed the issue of whether an employee of a labor broker is also an employee of the client company and have answered in the affirmative.


Federal Law Treatment of the Labor Broker/Client Contractor Relationship. There are a wide variety of federal laws that regulate the employer-employee relationship, in addition to the state laws discussed above. A full review of each state and federal law would require more space than we can devote in this article, however. Below is a table that briefly summarizes the impact of key labor and employment laws on the labor broker/contractor arrangement. The essential point is that using a labor broker can change the effect and application of some employment laws, but not all. Under laws such as OSHA, Family and Medical Leave, COBRA and Davis-Bacon, using a labor broker will not change the contractor’s obligations. Under other laws, whether or not the contractor’s obligations can be delegated to the labor broker depends upon the nature of the relationship with the labor broker.


Common Pitfalls Associated with Labor Broker Agreements


Contractors often get the mistaken impression that because they are acquiring workers who already have an established employment relationship, the contractor owes no duty to these workers. However, both federal and state laws recognize joint employer relationships. Therefore, it is important for contractors not to make assumptions about the scope of their liability; rather, contractors and/or their legal counsel should carefully examine the scope of these agreements in light of the applicable federal and state statutes, as well as any relevant case law. Below is a partial list of common assumptions (or pitfalls) that contractors often make with regard to their relationship with labor brokers and the possible consequences of those assumptions.


Contractors do not believe they are governed by Title VII and Fail to adequately address sexual harassment and discrimination claims of temporary employees. Because Title VII is a remedial statute, courts have interpreted the term “employer” very broadly to include both the labor broker and contractor client in the typical labor broker scenario. When a contractor refuses to take appropriate remedial steps, the contractor might find he is liable for damages under Title VII, which include, but are not limited to, back wages and benefits, reinstatement, attorney’s fees and punitive damages for intentional discrimination.


Contractors assume they are not responsible for verifying that workers are working legally. When both the contractor and the labor broker engage in hiring the worker, both entities are responsible for ensuring that the worker is authorized to work in the United States. Failure to do so can result in sanctions being imposed on both businesses.


Contractors fail to verify that the labor broker has workers’ compensation insurance and is paying the premium. When the workers’ compensation premiums are not paid, both the labor broker and the contractor are subject to liability for various claims made by an injured employee. Workers’ compensation is intended to be an employee’s sole remedy for on-the-job injuries. Failure to pay exposes both companies to a multitude of claims. Some state laws also prevent employers who fail to pay workers’ compensation premiums from using negligence of an injured workers’ co-employee as a defense.


Contractors believe they are automatically covered by workers’ compensation law protections if the labor broker is paying the premiums. Workers’ compensation laws differ from state to state. Each contractor must make sure that he is covered, with respect to each state in which it does business, by the workers’ compensation statute. Otherwise, an injured worker can file suit against the contractor, even after the worker has received workers’ compensation benefits. Practically speaking, this results in the contractor paying for an injury it also pays the labor broker to cover with insurance. It should be remembered that labor brokers factor the cost of workers’ compensation in the prices they charge their contractor clients for the services of the workers.


Contractors assumes the labor broker is properly paying employees for all hours worked and overtime. FLSA regulations specifically recognize the concept of joint employer and state that liability on the client company can be imposed for the labor broker’s failure to pay the employees for the hours worked, plus any overtime for work done that is related to the joint employment relationship.


Contractors assume because they do not have the requisite number of “permanent” employees for purposes of various statutes, the statutes don’t apply to them. As has been demonstrated above, some statutes require the contractors to count the workers they acquire from the labor broker, as well as their “permanent” employees for purposes of determining whether the company has the necessary amount of employees to be covered by a statute. Companies must be sure to count these employees to avoid unintentionally failing to comply with the FMLA and COBRA.


Contractors fail to verify that the labor broker is paying unemployment taxes. As noted above, with respect to state unemployment taxes, the contractor can be held liable for a labor broker’s failure to pay unemployment taxes to the workers it provides to its client. Therefore, it is imperative that contractors ensure the labor broker is paying these taxes.


Contractors fail to properly draft benefit plan documents. If a contractor uses some permanent workers and also some temporary workers, and decides to provide benefits to its permanent workers to the exclusion of the temporary workers , poorly drafted benefit plans could result in the contractor being required to extend benefits to its temporary workers.



Terms of Labor-Broker Agreements


A carefully drafted agreement between the labor broker and the contractor is of the utmost importance. While the terms of the agreement will not control a court’s analysis for purposes of determining whether a joint employment relationship exists, careful drafting is necessary to ensure that the contractor is adequately protected should a court find that a “joint employment” relationship exists and the labor brokers’ acts or omissions expose the contractor to liability. Additionally, as will be further discussed below, a carefully drafted document may serve to relieve the contractor of some liability under various federal statutes that regulate employer-employee relationships. Below is a partial list of such issues that should be contractually addressed to maximize the contractor’s protection from unintended liability for the acts of the labor broker, as well as to minimize the likelihood of a court concluding that a joint employment relationship exists:12




1. The agreement should clearly describe the responsibilities each party will have with respect to the shared workers.


2. The agreement should indicate how the parties will cover potential liability to the contractor for any acts or omissions of the labor broker that expose the contractor to liability, for example, failure to pay wages, OSHA violations, failure to pay employment taxes, unfair labor practice charges, Title VII, etc.


3. The agreement should identify which party will be responsible for compliance with the various federal, state and local laws that govern an employee’s working environment.


4. The agreement should specify how the parties will allocate responsibility to the labor broker for problems in the workplace including, but not limited to, safety concerns and harassment issues.


Conclusion


When contractors enter into agreements for workers with labor brokers, they should carefully scrutinize the terms of the agreement to make sure they are not exposing themselves to unintended liability. This can often be difficult because, as discussed above, the terms “employer” and “joint employer” are defined in a number of ways by the different statutes that regulate employer-employee relationships in the various states.


A common feature in many of the differing definitions of these terms is the alleged employer’s control of the worker and the working relationship. Therefore, in an attempt to prevent employer or joint employer status, a contractor might remove himself from the daily control of the workers by contractually delegating his control over the workers to the labor broker. However, not only does this as a practical matter defeat the purpose of hiring the workers, even if a contractor were able to successfully contract away his legal right to control the workers, this would not affect its obligations under OSHA, the FMLA and COBRA, and may be detrimental to the company with respect to workers’ compensation laws.


A court’s analysis of whether the duties have been sufficiently delegated is not a superficial one; to the contrary, the courts will take a long, hard look at the facts to ensure that the correct company or companies is/are saddled with the responsibility of complying with the relevant laws.


Whether or not a contractor is able to successfully delegate his authority and responsibility to the labor broker under some statutes, there will still remain some duties and obligations that cannot be avoided or changed.


Contractors should bear in mind that successful relinquishment of these duties to the labor broker is a lot easier said than done. Contractors should also be mindful of the fact that the contractual language in the agreements between the labor brokers and their contractor clients will not control the courts’ analysis. Before concluding that the contractor is not an employer, courts will explore the facts of the case to find out whether the contractor has made any meaningful delegation of its authority (or whether the contract is a being used as a sham so that the contractor can prevent application of the relevant laws to its conduct). Therefore, contractually delegating the authority to control the workers to the labor broker, without actually delegating the control, will not relieve the contractor of its obligations under the various statutes. As a result, client companies should assume that they will be considered an “employer” or “joint employers” of the workers acquired from the labor broker and should govern themselves accordingly.


Footnotes

1 The contractor may be referred to throughout this paper as the “client company” or the “customer company” of the labor broker.


2 Because the classification of an individual as an “employee” has legal significance in state and federal statutory schemes regulating the employer-employee relationship, unless otherwise stated, “worker” is used. “Worker” is used when the issue of the status of the individual as an employee of the labor broker, or the contractor, or both has not been resolved.


3 A business may acquire a worker in the following ways: (1) directly as its own employee; (2) directly as an independent contractor; (3) through a third party as its employee (joint employer); or (4) through a third party as an independent contractor. See Schrader, Charles R., PEOs and Labor Brokers in the Construction Industry, p. 6, Jordan Schrader, P.C. (2004).


4 Id. at 1.


5 Orly, Lobel, The Slipperiness of Stability: Contracting for Flexible and Triangular Employment Relationships in the New Economy, 10 Tex. Wesleyan L. Rev. 109 (Fall 2003).


6 This paper will focus primarily on federal laws that regulate employment relationships. However, many states have employment laws comparable to the federal statutes. In some cases, these state laws are stricter and impose more liabilities on employers than do their federal counterparts. In addition, some employment issues are governed primarily by state laws and these laws do vary. Therefore, an analysis of the company’s state of residence and all states in which the company operates is necessary to determine the full impact of the labor broker relationship.


7 Labor brokers are known by various other terms, including professional employer organizations (PEOs), labor leasing organizations, employee leasing companies, labor contractors, etc.


8 See generally Farrell v. Dearborn Mfg. Co., 416 Mich. 267, 275-76 (Mich. 1982).


9 Situations in which a client company contacts a labor broker in hopes of acquiring an “independent contractor” are beyond the scope of this paper. However, the client company should bear in mind that a court will make a factual inquiry to determine whether the worker is truly an independent contractor or an employee. Therefore, the analysis will be roughly the same as the analysis discussed in this paper to determine whether an entity is properly classified as an employer of a worker.


10 See generally Nationwide Mutual Ins. Co. et al. v. Darden, 503 U.S. 318, 323-24 (1992) (noting that these factors are considered when determining whether a worker is an “employee” under the traditional common law definition of “employee.”)
11 The above-referenced cases or statutes were all in the workers’ compensation context. Because not all states have addressed this issue in statutes, the common law analysis used in the workers’ compensation context is typically the approach used to determine the status of the parties’ in tri-party employment arrangements. Because the common law factors are geared to finding which party exercises some degree of control over the workers, both entities are likely to be considered employers of the workers. See generally, Arkansas: Ark. Code Ann. 23-92-315; Florida: Florida Stat. Ann. § 440.11; Maine: Maine Revised Statutes Title 32, § 14055; Utah: Utah Code § 34A-2-105; Rhodes v. Alabama Power Co., 599 So. 2d 27 (Ala. 1992); Daniels v. Riley’s Health & Fitness Ctrs., 310 Ark. 756, 840 S.W.2d 177 (1992); Beaver v. Jacuzzi Brothers, Inc., 454 F.2d 284 (1972) (applying Arkansas law to bar temporary employee’s claim against client); Jones v. Sheller-Globe Corp., 487 N.W.2d 88 (Iowa Ct. App. 1992); Lesanti v. Harmac Indus., Inc., 175 A.D.2d 664, 573 N.Y.S. 2d 802 (1991); Honey v. United Parcel Serv., 879 F. Supp. 615 (S.D. Miss. 1995); Foran v. Fisher Foods, Inc., 17 Ohio St. 3d 193, 478 N.E.2d 998 (1985); Nix v. Columbia Staffing, Inc., 471 S.E.2d 718 (S.C. Ct. App. 1996) (temporary workers loaned to owner and tort suit by employee of subcontractor barred); Regalaldo v. H. E. Butt Grocery Co., 863 S.W.2d 107 (Tex. Ct. App. 1996). But see infra, n. 12.


12 Schrader, p. 9.

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