Employee leasing, PEO’s, or hiring workers through a temporary agency are often sold by vendors as a shield to keep employers from being liable for employment law violations. Fact or Fiction? Unfortunately, that assertion is usually fiction. Read on to find out if these arrangements really provide any protection for businesses fearful of employee lawsuits.
Some businesses set up multiple companies, only one of which has any employees. That company loans or leases the employees to its affiliated companies. The goal of such arrangements is to shield the non-employing companies from liability to workers. However, under many state and federal statutes, as well as common law legal theories, the business entity using the workers is also liable under a variety of legal theories. Usually, the managers in each business entity direct and control the workers’ tasks and provide supervision. Thus, if those managers commit employment law violations, the law will likely find that the entity was legally the employer or a joint employer with the leasing entity. Other situations trigger agency law. If the entity using the workers acts as the agent of the leasing entity – in directing the workers, the agent and principal can both be responsible legally.
Other legal concepts or statutes make both the employing entity and the working business “joint employers” so by definition both are legally responsible.
PEOs are “professional employee organizations.” They are companies set up to do nothing but hire and lease workers to other unrelated businesses. They provide all of another entity’s workers, pay them, and provide benefits such as health insurance and pension plans. They often tout their services as insulating businesses from all liability to workers. Not so. As noted above, the entity using the employees makes decisions about their hours, assignments, and performance, as well as directing their work daily. If that business and its managers take actions that constitute discrimination, harassment, or wage and hour law violations for example, they will be liable and use of a PEO offers little or no protection.
While the PEO may be able to provide better benefit plans to the workers, buy more affordable employment practices liability insurance, and handle payroll, a PEO will not insulate the business where the employees actually work.
Some businesses obtain all or a significant part of their workforce via a temporary services agency. Such agencies provide temporary or temp-to-hire workers to a variety of businesses. Use of temp workers can be of critical help to a business with regular fluctuations in workload or unexpected needs for additional workers on short notice. While using temp employees can be a very effective business solution, it will also not shield the working entity from legal liability if that business or its managers commit acts that violate employment laws. The business will be held to be a joint employer with the temp agency or its agent.
Furthermore, usually temp employees are excluded from a working entity’s benefit plans and other employee perks. However, an employer may not be able to avoid covering temp employees under its employment benefits plans if they work on a regular basis long term. So this solution may actually expose an employer to further liability if temps are used incorrectly and later claim they were regular employees entitled to full benefits, rather than excluded temporary workers.
An employer should carefully evaluate these alternatives to hiring its own employees. While these solutions might make sense in some situations, they are not a panacea and do not shield businesses from liability for employment law violations. Consult your legal counsel and carefully review and negotiate terms of any agreement before entering into an alternative employee arrangement. Many of these agreements are one-sided and do not favor the contracting business which thought it was getting complete protection.