Co-employment is complicated, Trying to protect yourself from co-employment can expose your organization to discrimination lawsuits

By Julie Scagell and Ashish Kaushal

Co-employment has been a topic discussed and debated ad nauseam for decades amongst lawyers, employers, and suppliers of contingent labor. There have been public cases at Nationwide Mutual Insurance and Microsoft resulting in millions of dollars awarded to plaintiffs. Those are the ones that make headlines. There are thousands more we never hear about, often dismissed because of lack of evidence supporting co-employment claims.

The truth is, co-employment is pretty tough to prove. Many companies believe putting in tenure limits, giving contractors different colored badges, or not inviting them to company- sponsored events eliminates the risk that they will be seen as a contingent worker’s employer of record. Unfortunately, making up arbitrary contract length and other “separation” rules does little to protect them. Employment case law rulings like Ling Nan Zheng v. Liberty Apparel Co and others suggest these protections have minimal to zero impact on defending against co-employment.

 The notion that co-employment is a risk to be avoided is a somewhat archaic notion – in fact, there’s nothing inherently risky about it at all. In most staff augmentation situations, you have co-employment regardless of badging, parties, and the like. These workers are in your building, using your equipment, and getting work direction from someone other than their employer – the very definition of co-employment.

Certain factors can protect a company against potential lawsuits and they depend a great deal on the entirety of the work engagement and its economic impact on a contractor. Trying to evade the system by hiring contractors as long-term “permatemps” to avoid paying stock options, pensions, and health coverage is a key element brought up in many co-employment suits, as is hiding these resources under SOWs.

Another is to ensure the language in employee benefits documents, pension, stock and bonus plans, a company’s insurance plan, intellectual property, and company property documents specifically define who is and is not allowed to participate, expressly excluding contingent labor.

The same applies to any outside supplier you are partnering with to bring in contingent labor. Employment law violations fall on both an employer (supplier) and the company where the contingent worker is performing the work, and the supplier must have explicit language defining them as the employer of record, laying out the specific skill set of each contractor for a given assignment, a definition of work control, and ownership of any source of instruments or tools.

Trying to protect yourself from co-employment can expose your organization to discrimination lawsuits. Companies may be unintentionally creating situations that are discriminatory -- inviting reputational risks, lower productivity, and lawsuits to occur. Interestingly, one of the (many) reasons the lawsuit was brought forward against Microsoft was that temps felt ostracized, were unable to participate in company parties, and weren’t allowed to receive discounts at the company store.

Staff augmentation contractors are covered under federal anti-discrimination laws, such that if they feel they are being discriminated against on the basis of race, color, religion, sex, national origin, or disability, they can file claim against their employer and the company they were working. Legal action can also be taken if a contractor’s assignment is terminated or cut short because of a complaint covering the above or if a contractor feels they are being treated less favorably because he or she is a contingent worker. 

Often, companies don’t want to deal with problems that arise when dealing with a contingent worker; after all, that’s one of the benefits of working with a staffing supplier. The misunderstanding is that if a company is seen to be part of the solution, they may be looking and acting like an employer, thus risking co-employment. So, they don’t react to workplace fairness, harassment, or discrimination claims if it’s not their employee, but this “hands off” approach could lead to legal action being taken against them. 

Here are a few examples:

Under federal law, and under the laws of many states, employers are not automatically liable for sexual harassment so long as they maintain a harassment training and complaint program, investigate promptly, and take promt, effective corrective action following an investigation. Everyone in the contingent worforce area has a strong incentive to prevent, investigate and correct workplace harassment. But, in some cases contingent worker complaints are ignored either because the buyer/client assumes the staffing partner will handle the situation, or because the buyer/client does not want to take any action for fear this will make them look like a co-employer. However, if that investigation doesn’t take place immediately and corrective action implemented, it leaves that company open to a potential lawsuit.

As Michael Best & Friedrich LLP partner Eric Rumbaugh says, “Sometimes people wrongly think caring makes you a co-employer.”

The same goes for racial discrimination. Under federal law, it’s illegal to discriminate based on a person’s race, whether they are your employee or co-employee, or not an employee at all. If you are firing someone from their job, normal HR due diligence takes place to ensure an employee is not being unfairly discriminated against. In the case of contingent workers, however, some companies do nothing in that regard. They simply call the staffing firm and say, “fire John Doe.” No one did any due diligence to ensure John Doe wasn’t being discriminated against for his race, immediately opening a company up to further investigation.  And, again, sometimes the decision not to vet the termination is conscious – the company does not want to do basic due diligence because they think the risk is all on the staffing partner and/or because they (wrongly) think their decision is beyond legal scrutiny because they are not the employer.

Co-employment is a complicated, often misunderstood subject and companies often attempt to protect themselves by putting themselves at even greater risk. Not only does this open them up to legal action, but the reputational damage in an era where the war for talent is at an all-time high can leave companies unable to maintain their competitive edge.