Joint Employer Liability, Quirky Question # 70

Quirky Question # 70:

Our company frequently hires workers through employment placement agencies – some on a temporary basis, others for more long-term assignments.  The placement company pays them and withholds employment taxes on their behalf.  We sign contacts saying that the workers are independent contractors and we are not their employer.  We recently terminated one of the workers who was pregnant and she is threatening to sue us as well as the employment agency.  Should we be concerned about potential liability under California law?

Dorsey’s Analysis:

Your question highlights an issue that is receiving considerable judicial attention in a variety of contexts — joint employer liability.  The bottom line is that you have reason to be concerned. Under California law, your company may be found to be a “joint employer” with the employment agency and therefore could be on the hook for claims of harassment, discrimination or retaliation notwithstanding what your contract may say about the person’s status.

First, the basics:  California law, like the federal Title VII, prohibits discrimination on the basis of sex.  Under California law, sex is defined to include pregnancy, childbirth, or medical conditions related to pregnancy or childbirth.  What this means is that, as with other protected categories under state and federal law, it is important that an employer not take any adverse employment actions against a worker “because of” her pregnancy.  California law also requires an employer to provide up to four months leave for a woman disabled by pregnancy and to transfer a woman to a less strenuous or hazardous position for the duration of her pregnancy if she so requests, with the advice of her physician, if the transfer can be reasonably accommodated.  Therefore, the decision to take any action adverse to a pregnant employee should always be carefully scrutinized.

Some businesses believe that using an employment agency to supply temporary or even long-term workers will insulate them from discrimination claims so that they need not scrutinize their employment decisions as carefully.  This is not true.  As with federal law, California courts may find both entities to be joint employers depending on the amount of control the contracting business exerts or has the right to exert.  In evaluating whether the contracting business is a joint employer the courts will look at the totality of the circumstances, with specific focus on factors such as the nature and degree of control over employees; the day to day supervision of employees, including discipline; the authority to hire and fire employees and set conditions of employment; and control of employee records and payroll.

While all of these factors should be taken into consideration, both policy and practical considerations lead to the conclusion that a business cannot afford to parse them too finely.  Courts facing claims of discrimination and harassment have had little difficulty finding that each “employer” bears responsibility for the offending actions.  For example, in Mathieu v. Norrell Corp. (2004) 115 Cal. App. 4th 1174, the court found the temporary agency and its client to be joint employers in a case involving sexual harassment.  In explaining its decision, the court easily found that the purpose of the California Fair Employment and Housing Act (FEHA) is to safeguard an employee’s right to hold employment without discrimination.  That purpose, the court said, is best served by a finding of dual employment.  The employment agency was found to be a joint employer based on the facts that it paid the employee and she was required to report to the agency if she were to miss a day of work.  “To hold otherwise would allow . . . temporary agencies to send their employees into hostile and discriminatory workplaces and to ignore complaints of harassment without fear of liability.”

The same policy arguments that led the courts to safeguard the employee’s right to work without discrimination also apply when courts determine whether the contracting business should be subject to liability.  Even if the temporary agency is issuing the paycheck, where the business has the right to control the work environment, and especially where the business has the right to terminate the worker at any time, the contracting business will likely be found to be a joint employer.  As with the analysis of whether any worker is an employee or independent contractor, the contractual terms by which he or she is employed will not be conclusive.  The key is the right to control.

As with many legal issues, the legal standard to be applied is a little fuzzy.  There is no bright line test or magic formula as to when both entities have sufficient control to be found liable.  The cases do require that the amount of control exercised be “significant” and that the contracting business have the ability to affect the terms and conditions of the worker’s employment.  If it is undisputed that only the temporary agency has the ability to hire and fire, set compensation, or train the person, there may not be a basis for also suing the contracting business.

However, as a practical matter, if you are the contracting business, the lack of a bright line standard will work against you.  First, as we have seen, as a matter of policy the courts will protect the individual who is being discriminated against and will not let finger pointing between the two entities result in the employee being left without a remedy.  Second, because the determination of whether or not an entity is a joint employer often involves a detailed factual analysis, it is difficult to have the question decided as a matter of law on a summary judgment motion. Finally, a plaintiff will always look to the bigger and more well-funded entity (usually but not always the contracting entity) as the deep pocket from whom to seek redress.  What this means is that the employee will sue both entities and attempt to leverage a settlement whatever the two entities’ respective involvement.

Two additional points bear noting:

First, although your question doesn’t directly involve the harassment of a worker, it’s important to note that under FEHA an “employer” can be liable for the harassment of “a person providing services pursuant to a contract.”  Government Code §  12940(j).  This means that the employer may be liable for acts of harassment against a worker even if the person claiming harassment meets all the tests for a classic “independent contractor” (i.e., she has the right to control the performance of the contract and discretion as to the manner of performance; is customarily engaged in an independent business; and, has control over the time and place the work is performed, supplies the tools and instruments used in the work, and performs works that requires a particular skill not ordinarily used in the course of the employer’s work.)

Second, the concept of “joint employment” is applied beyond just the arena of discrimination and harassment laws.  Although it is beyond the scope of this analysis, contracting businesses should know that courts have considered both temporary agencies and their clients to be “joint employers” in the context of wage and hour laws, the Family Medical Leave Act (FMLA), workers’ compensation liability, and tax liability. Special rules also apply under California law for determining liability for unemployment insurance and disability contributions.

The bottom line:  Employer beware.  Make sure that whether an individual is clearly your employee, or falls into the sometimes gray area between employee, independent contractor, and leased employee, you make your decisions as to the terms and conditions of that person’s employment based on legitimate business needs that you can clearly articulate and have documented.

Dorsey & Whitney

Dorsey is a business law firm, applying a business perspective to clients' needs. We make it our first priority to know the context in which you do business - your market, your competitors, your industry.

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