Could You be Liable for the Sins of Your Staffing Agency?

Many businesses use staffing agencies to supplement their regular employee workforce with temporary workers.  Staffing agencies can be extremely valuable for a company seeking to save money (e.g., taxes and employee benefits) which it would have to pay for regular employees or when the nature of a company’s business (e.g., manufacturing) requires it to be as nimble as possible in meeting fluctuating production and staffing needs.

However, many companies are unaware that they can be held liable for their staffing agencies’ violations of law if the entities are found to be “joint employers.”  For example, companies and their staffing agencies can be held jointly liable for violations of discrimination and harassment laws.  Likewise, if a staffing agency fails to pay its workers minimum wage or overtime as required by law, both the company and the staffing agency (and their respective principals) can be held jointly liable for such violations – even when the company is unaware of the staffing agency’s violations!

While a court or wage enforcement agency’s determination of joint employment is not necessarily automatic, the criteria necessary to support such a finding are relatively easy to satisfy.  Factors that are examined include the degree of control the company exercises over the staffing agency’s employees (usually, quite a bit); which of the entities controls the employment conditions (e.g., the power to hire or fire the worker, and the determination of pay rate); the permanency and duration of the worker’s relationship with the company to which services are rendered; whether the work is an integral part of the company’s business; and whether the work is performed on the company’s premises.  No one factor is determinative – the totality of facts will be considered.  However, since the test is generally not difficult to satisfy, companies are wise to proceed under the assumption that they may be held jointly liable for the wrongdoings of their partner staffing agencies.

The federal Department of Labor has investigated and taken legal action against many employers and their staffing agencies for the staffing agencies’ violations of federal wage and hour laws.  When such violations exist, financial consequences can be substantial, including the company, staffing agency and their principals being held jointly responsible for paying back pay (which is most often doubled with the imposition of liquidated damages), and civil money penalties.

Given the potential for such liability, damages and penalties, what steps can you take to avoid being the victim of your staffing agency’s misdeeds (or at least minimize the risk and/or consequences)?  Perhaps most importantly, you should do your homework and make sure to vet the staffing agency as thoroughly as possible before you use it.  For example, obtain references from other companies that use the staffing agency that you are considering (just as you should do for an employment candidate).  Conduct some online research or contact your attorney to determine whether the staffing agency has been involved in any litigation involving its treatment of workers.  Ask the staffing agency very direct questions regarding the steps it takes to ensure compliance with all employment-related laws.  Furthermore, your company and the staffing agency should have a formal written agreement which covers not only items such as rates, “temp-to-hire” requirements, and termination provisions, but also requires the staffing agency to take very specific measures to comply with laws concerning the payment of wages, illegal harassment and discrimination, workers’ compensations, and employment taxes, to name a few.  The agreement should also contain specific provisions by which the staffing agency promises to indemnify your company in the event that your company is held liable as a joint employer for violations of law committed by the staffing agency.  If presented with a written agreement by the staffing agency, do not simply gloss over the legal provisions and sign it.  Instead, make sure to have an attorney who is familiar with staffing company agreements and applicable laws review and advise you on the agreement.  In addition, after engaging the staffing agency, your company should periodically “audit” the staffing agency (e.g., review its payroll records and check employee pay stubs) to monitor and help to ensure legal compliance.

In short, while staffing agencies can provide a vital source of workers for your business (often when it is impractical or impossible for you to directly hire certain employees), contracting with such businesses can also expose your company to a host of legal consequences, even when you are completely unaware of the existence of violations.  Thus, taking some basic preventative measures can go a long way in preventing or mitigating those risks.

About Jonathan Sigel

Jonathan is a partner in the firm’s Labor, Employment and Employee Benefits Group and chair of the firm’s Higher Education Group.  He advises clients on a broad range of employment issues, including employment and severance agreements, handbooks and policies, and terminations and layoffs.  Jonathan also advises management on proper wage and hour classification. Jonathan represents clients in investigations by the Department of Labor and the Massachusetts Office of the Attorney General.  He has extensive experience representing management in the negotiation and litigation of employment and discrimination claims in the state and federal courts, and appears frequently before the Massachusetts Commission Against Discrimination and the Equal Employment Opportunity Commission and represents employers in wage and hour litigation in court. 
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