In today's economy, organizations are increasingly looking to nontraditional sources of labor, including use of leased, outsourced, and other staffing arrangements that involve individuals who may not be on the organization's payroll. A variety of federal and state agencies and courts have been giving these arrangements closer scrutiny to ensure that workers are receiving all the protections of law and that all financial responsibilities to the workers and the government are being satisfied. Failure to meet these requirements can lead to liability for back wages, and back taxes, back benefits, in addition to a variety of damages, penalties, and attorneys' fees.

One area that has received increased scrutiny in recent months is joint employment. For more information on joint employment developments, please access the recording and slides from our past webinar on this topic

Many companies enter into agreements with staffing companies in which the staffing company is designated as the employer and is responsible for ensuring compliance with state and federal laws. The vast majority of arrangements with staffing companies give the client company sufficient control over the contracted workers for the client company to be considered a "joint employer" with the staffing company. Indeed, the nature and degree of control exercised by the client is a factor considered by the Department of Labor, the National Labor Relations Board, and the Occupational Safety and Health Administration, among others, when analyzing whether a joint employment relationship exists.

Where a joint relationship exists, the client company is equally responsible for the failure of the staffing company to follow the law. Accordingly, it is increasingly important for the client to minimize its liability for actions of the staffing company.

The following are provisions that should be reviewed carefully in contracts with staffing companies:

  • Legal Compliance. A staffing agreement should not only list the duties and responsibilities of the staffing firm, but also should memorialize the staffing company's obligation to comply with all relevant federal, state, and local laws. It should expressly require compliance with employment and tax laws.

  • Defense and Indemnification. The client company may require that the staffing firm defend and indemnify the client for all claims, losses, and liabilities to the extent caused by the staffing company's breach of any of provisions contained in the staffing agreement. This clause may also reserve to the client the right to choose its own counsel to defend it at the staffing company's expense. The staffing company may also seek defense and indemnification if liability arises out of the actions of the client company's employees or if the liability arises out of inaccurate information provided by the client company. Any provision should also address the extent to which it survives termination of the agreement.

  • Limitation of Liability. If there is a provision that explains the limitations on liability or indemnification, both parties should fully understand what is and is not covered. Typically, staffing agreements do not allow for recovery for incidental, exemplary, special, punitive, or lost profit damages.

  • Auditing. The client company should reserve the right to audit the staffing company to ensure that the staffing company is complying with all relevant federal, state, and local laws (i.e. that the workers are being recruited by the staffing company in accordance with Title VII, the Americans with Disabilities Act (ADA), etc., and paid in accordance with state and federal wage laws). The staffing company may want the right to audit as well to ensure information provided to it by the client company is accurate.

  • Health Coverage. A client company may minimize its exposure under the Affordable Care Act's employer mandate by requiring the staffing company to offer health coverage that meets applicable standards to all full-time employees and paying the staffing firm more for those full-time employees who elect coverage than those who do not. For these purposes, the applicable standards pertain principally to the value and affordability of coverage, and an employee will be considered full-time if he or she averages 30 or more hours per week. The contract should also require the staffing company to assume responsibility for IRS reporting requirements relating to the employer and individual mandates.

Of course, the agreement is only as good as the parties to it. Therefore, companies should contract with reputable parties with established records of legal compliance, consider bonding requirements in the contract if there is any concern about the ability to satisfy the indemnification provisions, and should allow the company to terminate the contract if there is any hint that the other company is not complying with the law. Finally, the parties should remember that there are certain obligations that cannot be contracted away or indemnified against, such as non-monetary obligations which may exist under statutes like the ADA, Title VII, and the National Labor Relations Act.

Ballard Spahr's Labor and Employment and Employee Benefits and Executive Compensation Groups routinely assist employers in ensuring compliance with federal, state, and local statutes and regulations. We also regularly draft employment and staffing agreements that comply with today's complex regulatory requirements, and we advise on the benefit plan implications of such arrangements.  

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.