It is critical that entities take affirmative steps to minimize the risk of individuals employed by third parties being deemed employees of the entities for which they perform services. Failure to do so may subject an entity to liability under the Fair Labor Standards Act (“FLSA”), state labor codes, various anti-discrimination statutes and the common law.

In a typical scenario, a worker is employed by an outside contractor, not the entity for which he or she performs services. As a result, the entity for which the worker performs services does not concern itself with ensuring that the individual is paid minimum wage and overtime pay required under the FLSA and state labor codes, nor does such entity provide the individual with benefits generally afforded to employees of such entity. The entity for which the worker performs services exercises control over the individual’s activities, including the power to hire and fire him or her and control his or her wages, hours, working conditions and quality standards governing the individual’s work. The worker is also prohibited from working for other entities.

Relations between the individual and the entity for which the worker performs services then sour. Claiming that the contracting firm and the entity for which he or she performed services were joint employers, the worker then proceeds to assert a variety of claims against the entity for which he or she performed services; possibilities include minimum wage and overtime pay claims under the FLSA and state labor codes, claims for benefits provided generally to employees of the entity but not to the individual (e.g., stock options), claims for discrimination under federal, state and local law and claims under the common law. As the foregoing scenario suggests, employers must be careful when utilizing the services of a contracting firm’s employees to avoid becoming subject to various claims.

The steps an employer may take to minimize this risk include the following:

  • Leave the recruiting and hiring to the contracting firm. Typical first-day forms should be completed by the worker for the contracting firm and not you, and the contracting firm should have sole responsibility for I-9 verification. 
  • The worker should receive compensation from the contracting firm, not from you. Your entity should be paying a fee for the worker’s services pursuant to an invoice from the contracting firm. The worker should receive his or her compensation directly from the contracting firm (who should be responsible for legally required withholdings). 
  • The worker should not receive benefits received by employees, such as health benefits, tuition reimbursement, etc. 
  • Where feasible, do not have the worker performing the same services performed by your own employees. 
  • Where feasible, the services the worker performs for you should be task-oriented, rather than time-oriented. Do not restrict the worker from performing non-competitive services for other entities during the period he or she performs services for you. 
  • Avoid assuming disciplinary and related responsibilities for the worker. No performance reviews should be done by you. Your supervisors should not be providing warnings or other disciplinary action directly to the worker. 
  • Do not otherwise treat the worker as your employee. By way of example only, do not provide a copy of the employee handbook to the worker. Also, carefully consider whether you should add the worker to your email system or provide the worker with business cards. 
  • Make the worker’s assignment to you of a relatively brief, fixed duration. The longer the duration, the more likely a court will rule that the worker is your employee. Keep track in human resources (or some other central location) how long the worker has performed services for you and reassess the relationship at regular intervals.
  • If you no longer require the services of the worker, the contracting firm should be responsible for informing the worker
  • Avoid the urge to subject a worker to restrictive covenants following the termination of his or her assignment with you. 
  • Avoid any suggestion in the contractual documentation between you and the contracting firm that the worker is your employee. While courts will generally not find this factor persuasive, you should avoid permitting the worker to point to documentation between the two entities supporting his or her argument that he or she is your employee. Indeed, you should use such documentation to clarify the nature of the relationship and contractually bind the contracting firm to manage its employees in a manner that will minimize the risk to your company.

While not all of these procedures will be feasible or desirable in every situation, employers are well advised to analyze contractor relationships to minimize the risk of becoming subject to liability under various federal, state and local statutes and the common law