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Temps: Indepedent contractors or common-law employees?

August 15, 1999

7 Min Read
Temps:  Indepedent contractors or common-law employees?

Hiring temporary workers makes sense in the molding industry for many reasons. During busy periods, temporary workers can provide needed support to production, quality control, and secondary operations, helping to offset the peaks and valleys of production requirements. Temporary work assignments also allow employers looking for permanent, full-time workers to assess the abilities and work ethics of potential employees before making a long-term commitment.

A recent ruling, however, is threatening to take the advantages out of hiring temps. A three-judge panel of the U.S. Court of Appeals for the Ninth Circuit has ruled that workers who are on the company payroll for more than a few months, as contract workers or permatemps, are common-law employees and are therefore entitled to all the same benefits as regular employees.

That means the economic incentive (a potential savings of up to 40 percent on total labor costs) encouraging companies to use the services of temporary workers could virtually disappear.

Employee or Temp?
The ruling stems from suits filed by workers at Microsoft who had been hired as independent contractors or freelancers, and who had signed agreements saying they were independent contractors. In 1990 the Internal Revenue Service told Microsoft that it (Microsoft) had improperly classified a few hundred independent contractors whom the IRS said should have been considered permanent employees, and thus entitled to benefits.

Microsoft then hired some of the workers as employees and shifted others to the payroll of temporary staffing agencies. Attorneys for Microsoft believed that a subsequent class action suit against the company for benefits during the disputed time period would apply only to those employees who’d been misclassified as independent contractors. A Seattle judge agreed.

However, on May 12, a three-judge panel overruled the lower court judge because they saw little or no difference between independent contractors and temps at the company. That ruling expanded the number of persons who could join the Microsoft class action.

The panel explained that even though a worker may be employed by a temporary staffing agency, if Microsoft controls the worker on the job, Microsoft can be regarded as a joint employer with the temporary agency.

Too Much Control
If a company is going to exercise a level of control over temporary workers that could result in courts looking at these temps as actual employees of the company, then there’s going to be a problem, says Fredric S. Singerman, an attorney specializing in employee benefits with Seyfarth, Shaw, Fairweather & Geraldson (Washington, DC). Although not expected to have a major impact on the hiring of temporary workers nationwide, Singerman says the new ruling could make it “somewhat more difficult” for companies to use temporary workers on a long-term basis.

What about the length-of-time issue? Singerman points out that the ruling doesn’t actually designate a specific time period in which a temp becomes an actual employee. “It’s not a time test,” says Singerman. “It’s a control test.” The amount of control an employer has over a worker can make the difference in the worker being classified as an employee, an independent contractor, or a temporary worker.

Edward A. Lenz, general counsel for the National Assn. of Temporary & Staffing Services, agrees. “Length of time is one element among many others, but it should not be given overriding weight when deciding employee classification,” he says. “However, length of time indicates a relationship,” he adds.

Avoiding Problems
To avoid problems associated with control of temporary workers, many temporary staffing agencies offer onsite management services in the client’s plant. In this scenario, an agency supervisor oversees the temporary workers; hires and fires them; initiates their training, drug testing and other employee testing programs; and generally takes care of all employment issues related to the agency’s employees.

Lenz says that businesses will have to rethink how they interact with temporary workers, minimizing their contact wherever possible. “Obviously there’s got to be some supervision and there needs to be some accommodation for that,” he notes. But, he cautions, “Don’t get involved in the recruiting, screening, and hiring of temporary workers, and don’t dictate the pay and benefits the worker should get.”

Singerman advises companies to review their employee benefit and compensation plans to make sure the plans cover only those workers who should be covered. “You can put language in your benefit and compensation plans that specifically excludes temporary employees hired through a staffing company,” Singerman says.

Problems can arise, for example, if a company’s health insurance plan has a relatively short waiting period of 30 days. If the benefit plan doesn’t clearly and explicitly exclude temporary workers, and a company has temps working for it longer than 30 days, it has to consider what impact the ruling will have.

Lenz says there needs to be explicit agreements between the worker, the staffing firm, and the client. “All three parties need to understand that the employee is employed by the staffing firm and not entitled to benefits from the client company,” he says. “This agreement or waiver needs to be consistent with the company’s benefit plan documents.”

Singerman also advises companies to take a hard look at the agreements entered into with temporary staffing agencies, and to “specify who’s bearing the risk for this type of lawsuit,” should one arise.

What makes an employee?

The issue of whether or not someone doing work for a company is an independent contractor or an employee boils down to the direction and control of the worker.

Typically an independent contractor is someone who has his (or her) own business, pays his own self-employment taxes, works for more than one company, and is free to operate his business as he sees fit by setting his own work schedule. Independent contractors do not receive benefits from any of the companies with which they contract for services, receive no training from those companies, and receive a Form 1099 to report taxable earnings.

The IRS has a 20-point test to help employers determine who is an independent contractor and who is an employee. According to the IRS, a person is considered an employee when the following items are true of the employer.

  • Has the right to give instructions, either written or oral.

  • Provides training to the individual.

  • Gives direction and control over the person’s services.

  • Is interested in the worker, not just the worker’s services.

  • Hires, supervises, and pays an assistant for the person providing services (indicates control over the worker).

  • Has a continuing relationship with the person.

  • Sets the hours of work (indicates control).

  • Requires enough hours from the worker so as to restrict his ability to do work for other companies.

  • Controls the place of work (indicates control), or work is done on the employer’s premises, which can include designated routes, territories, or specific locations.

  • Sets order or sequence of a job, or has the ability to set order or sequence, even if the employer does not exercise this ability or exercises it infrequently.

  • Requires oral or written reports (indicates control, because the employer can use the reports to determine if the worker has followed instructions).

  • Furnishes tools and materials for the person to perform his or her job, indicating the person must use them in a particular order or by a particular method.

  • Makes a significant investment in the facilities needed for the person to perform work.

  • Can realize a significant gain or loss resulting from the work of the person.

  • Requires the person to work exclusively for the company and controls the person’s work. (A person can work for more than one firm as an actual employee. An independent contractor works for more than one person or firm and is free of control by any one firm.)

  • Requires that the person perform specific job functions strictly for that particular employer. (An independent contractor can offer his or her services to anyone through advertising or other means.)

  • Pays at regular intervals (i.e., by the hour, week, or month), except as a convenient way of disbursing lump sum payments.

  • Pays for business and/or travel expenses.

  • Has the right to terminate (indicates control).

  • Has the right to fire the employee without incurring any liability (indicates a relationship and shows control).

Contact information
Seyfarth, Shaw, Fairweather & Geraldson
Washington, DC
Fredric Singerman
Phone: (800) 525-7734

National Assn. of Temporary & Staffing Services
Alexandria, VA
Edward Lenz
Phone: (703) 549-6287
Fax: (703) 549-4808

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