Employment Law: Are Your Contractors Legal?

In October 2003, federal agents grabbed headlines when they raided 60 Wal-Mart stores, rounding up 250 illegal workers. About two weeks later, nine of the workers sued both the giant retailer and its cleaning contractors, which employed the workers, alleging that the companies failed to pay them overtime, withhold taxes and make workers’ compensation payments.

The Wal-Mart case has sparked discussions among employers and in the legal community, renewing interest in some fundamental legal questions for HR: Are employers legally liable for their contractors’ violations of employment laws? What, if anything, should HR do to monitor contractors’ compliance with these laws? While these questions are not new, they remain difficult to answer, especially in light of recent court rulings.

Employment lawyers say the Wal-Mart case is a wake-up call for HR to pay closer attention to the legal aspects of outsourcing, a common business practice.

Employers have long hired outside firms to handle security, cleaning, food service and other functions. But having someone else’s employees trim the bushes and take out the trash doesn’t necessarily relieve employers of liability for how those workers are treated. Companies that exert even a small degree of control over contract employees could end up like Wal-Mart—facing lawsuits brought by employees they didn’t hire.

“Unfortunately for employers, you can’t escape the risk of liability totally,” says Laura Schneider, a senior partner at Boston-based law firm Hale and Dorr LLP. But you can minimize liability by:

• Understanding your organization’s legal relationship with contractors and how that affects accountability.
  
• Understanding the significance of answers to the questions “What did you know?” and “When did you know it?”
  
• Defining your relationships with—and expectations of—contractors.

Joint Employment

Compliance with anti-discrimination, overtime, immigration, and other federal and state employment laws is a complex, time-consuming business. It’s enough to worry about one’s own workforce, let alone those of contractors.

But lawyers warn that employers should worry about “joint employment,” a legal relationship in which both contractors and their clients can be liable for violations of employment laws such as the Fair Labor Standards Act (FLSA), Title VII of the Civil Rights Act, and the Family and Medical Leave Act (FMLA).

Courts and regulators use various tests to see if an employer-contractor relationship falls under joint-employment rules. The tests’ specific factors vary but generally boil down to a simple concept: The more control that you, the client, exert over your contractors’ employees, the more likely you will be considered a joint employer—and be liable for any workplace violations they suffer.

(One new court ruling takes a different approach, minimizing the emphasis on control. For more information, see “Control Is Not the Only Issue.”)

The joint-employment tests take into account a range of factors, including which organization has the right to control how, when and where workers perform their jobs—even if that right is not exercised. Clients that have a say in their contractors’ hiring and pay rates or who share ownership or management responsibilities may be construed as joint employers, according to legal experts and court opinions. Professional employer organizations and temporary staffing firms, for example, may be considered joint employers with their clients.

Courts and regulators look at the actual employment relationship, regardless of what’s on paper. “What actually happens [day-to-day] is more important than what the contract says,” explains Peter Petesch, an employment attorney at Ford & Harrison LLP in Washington, D.C.

As a result, it is imperative that HR professionals establish the correct type of working relationship with contractors, then stick to that relationship. (For tips on setting up a relationship properly, see “Setting the Rules.”)

Limited Involvement Is OK

Employers need not be totally hands off to protect themselves, experts say. For example, it’s OK to inspect contract employees’ work to make sure the contract is being fulfilled, to ask a contractor to dismiss incompetent employees and to stop a worker from committing a crime, employment attorneys say.

But performing HR functions such as hiring—or imposing HR policies such as vacation days on a contractor’s workforce—goes too far. “Companies should give contractors the greatest latitude possible in compensation, hiring and other HR issues,” says Teresa Burke Wright, an attorney in the Vienna, Va., office of Jackson Lewis LLP. If employers impose their HR policies on contractors, they could be seen as joint employers.

The control issue can be tricky when contract employees work on your site. Courts are more likely to find that a company controls on-site workers than off-site ones, but each case depends on its facts, Wright says. For example, if you ask a contract janitor to empty some wastebaskets, are you supervising that employee? If you ask once or twice, no. But if you routinely make such requests, the court could determine that your company has enough control to be a joint employer.

Legislation-Specific Factors

Who is and who is not a joint employer depends on the nature of each employer-contractor relationship and the law at hand. Further complicating the issue are rules and regulations that apply to specific workplace laws. Different laws may require different tests to determine joint employment.

For example, under FLSA regulations, joint employment depends on whether an employee’s work is “completely disassociated” from his or her work at another employer. If it is not, both employers must comply with the law.

So, if a janitor works 30 hours per week for one company and 20 hours per week for another, and the companies are joint employers, the janitor will be entitled to 10 hours of overtime pay.

The “economic reality test” applied to the FLSA centers on economic dependence, writes Stephen Fishman, a San Francisco attorney and author, in Hiring Independent Contractors: The Employer’s Legal Guide (Nolo Press, 2003). Workers who depend on an employer to make a living are regular employees. Those with more independence—say, contract workers who work for different firms—are not, he writes.

The joint employer test is different under the FMLA, however. Two businesses that “exercise some control over the work or working conditions of the employee” may be joint employers—even if they have separate owners, managers and facilities—according to Department of Labor (DOL) regulations.

Only the “primary” employer—the one with the authority to hire and fire, assign employees, pay them, and provide benefits—is responsible for providing FMLA notice and benefits, DOL says. But both primary and secondary employers must count joint employees, including temps, to determine if they meet the 50-person threshold to be subject to the law.

This head count is key to determining an individual’s eligibility for FMLA leave. For example, assume Company A and Company B are joint employers; Company A has 40 regular employees and 15 temps from Company B. Together, they have more than 50 workers and must comply with the FMLA.

Head count was the central issue in a recent case before the 9th U.S. Circuit Court of Appeals in San Francisco. In that case, Stephane Moreau, an assistant station manager at San Francisco International Airport, sued his employer, Air France, because it refused his request for 12 weeks of family leave to care for his ailing father. Moreau took the leave anyway, and the airline terminated him.

Air France claimed it was not subject to the FMLA because it had fewer than 50 workers within a 75-mile radius of the airport. Moreau claimed the airline’s head count should include three ground-crew operators serving the airline, which would boost its number of employees to more than 50.

The court found that Air France was not a joint employer with the ground-based companies—which performed catering, aircraft cleaning and other services for the airline—because it did not exert control over those employees. The other companies hired and fired their workers, controlled their schedules, supplied their own equipment and otherwise operated independently of Air France.

Air France, then, was not subject to the FMLA and rightfully denied Moreau’s request for leave, the court ruled. (Moreau v. Air France, 9th Cir., No. 02-15872, Sept. 15, 2003.)

Fine-Tune Nosiness

Employers who keep contractors at arm’s length—and let them handle their own HR—are unlikely to get into legal hot water, but those who knowingly permit contractors to violate laws on their premises are looking for trouble, says Lawrence Z. Lorber, a partner in the Washington, D.C., office of Proskauer Rose LLP.

In his book, Fishman notes, “The less you know the better off you are. But if you do know, you can’t close your eyes. As a moral matter and as a legal matter, you should take action.”

If you get wind of a contractor’s possible wrongdoing, don’t intervene with contract workers, legal experts advise. Instead, complain directly to the contractor and ask the appropriate manager to take care of the problem in a timely way.

“HR would be well advised to know about the contracts and have a relationship with someone at the contractor to call right away” when compliance issues arise, says Roxana Bacon, a partner in Phoenix-based law firm Littler, Mendelson, Bacon & Dear.

If the contractor’s manager does not rectify the problem, consider terminating the contract. Of course, that will be easier to do if your agreements include language that holds contractors responsible for complying with workplace laws and that allows you to invalidate the arrangements if they fail to comply. (For more information on setting up a contractor arrangement, see “Setting the Rules.”)

But many HR executives and lawyers think it’s best for HR to keep its nose out of contractors’ employment practices. “I don’t believe this is a role for HR except in an advisory situation,” says Joy M. Gaetano, SPHR, senior vice president of corporate HR at USFilter Corp., a water services company based in Palm Desert, Calif. While the legal department should investigate possible noncompliance with labor laws, HR can help document that a contractor is truly independent, she adds.

“It’s a bit of a Hobson’s choice,” adds Petesch. “The more you delve into a contractor’s practices, the more you exercise control.”

For example, if you suspect your cleaning contractor of hiring illegal immigrants, should you ask to see the contractor’s I-9 forms, which verify that employees live and can work legally in the United States?

Barbara A. Lee, dean of Rutgers University’s School of Management and Labor Practice in New Brunswick, N.J., says yes. “You’re better off knowing the contractor’s obeying the law, even if it gives you more control.”

Others disagree. There’s no duty to inspect I-9s, either before or after a contract is signed, says Lorber. It’s also practically an impossible task for a large company with many contractors.

“If you start looking at the I-9s of your contractor, you can create liability problems for yourself,” adds George Lopez, an immigration attorney in the Miami office of Jackson Lewis LLP.

However, if you know of unauthorized workers and do nothing—an allegation in the Wal-Mart case—you could be in trouble, experts say. In this situation, ask the contractor’s HR manager or other executive to investigate. You should document your request; for example, you could mail a certified letter and keep a copy.

The worst possible outcome would be to share the blame with contractors for violating the law. Such a mistake could be very costly. According to December 1997 guidance from the Equal Employment Opportunity Commission, “where the combined discriminatory actions of a staffing firm and its client result in harm to the worker, the two entities are jointly and severally liable for back pay, front pay and compensatory damages.”

But HR should keep in mind that lack of liability does not prevent lawsuits, experts warn. Companies with deep pockets, such as Wal-Mart, make more attractive targets than small contractors. In addition, anti-discrimination laws define “employer” fairly broadly, making it relatively easy to sue an unsuspecting business.

Carolyn Hirschman is a business writer based in Rockville, Md. She has written for a variety of business publications and has covered workplace issues since 1991.

Web Extras

• SHRM article:  Control Is Not the Only Issue (HR Magazine)
• SHRM article: Setting the Rules (HR Magazine)
• Sample Independent Contractor Agreement (SHRM Sample Form)
• The HR Manager's Guide to Employment Practices Liability Insurance (SHRM Legal Report)