Outsourcing Labor Needs to Staffing Companies Comes With Risks


NEW YORK—A recent case settled by the United States Department of Labor (DOL) Wage and Hour Division highlights how companies, large and small, who outsource labor to staffing agencies may want to take precautions to ensure they are in compliance with the federal Fair Labor Standards Act (FLSA) and other employment regulations.

By way of example, a national food and beverage manufacturer outsourced a portion of its labor force to independent staffing agencies. An issue arose when one of their outside staffing agencies did not pay the outsourced employees overtime wages. The company claimed that it was “completely unaware” that these outsourced employees were not being paid properly. The settlement resulted in a $1.3 million payment of wages to the affected employees.

This is but one type of problem that can arise when there is a “joint employment” relationship. When staffing agencies provide workers to a company, some companies can be too quick to characterize those workers as independent contractors and/or assume that the staffing agencies are complying with all applicable employment requirements, such as minimum wage, overtime, workers’ compensation, health benefits and employment taxes among other requirements.

However, where a company exercises sufficient control over workers, such workers may be deemed “employees” rather than “independent contractors.” As well, in these situations, the company can be a “joint employer” with its staffing agency.

Where there is a joint employment relationship, both parties are responsible for all employment-related requirements not just those noted above. While the parties may agree that one, the other or both of them are responsible for any given requirement, both entities may nevertheless be responsible to the employee and/or governmental agency to make certain all applicable requirements have been met.

The DOL often evaluates several factors to determine whether a joint employment relationship exists including:

1.  The power to control or supervise the workers.
2.  The power to hire, fire, promote or demote the workers.
3.  Duration and permanency of the relationship.
4.  Whether specialized skills are required.
5.  Whose equipment is used.
6.  Whether the workers’ responsibilities are commonly performed by employees in that industry, among others.

Other agencies, such as the United States Equal Employment Opportunity Commission (EEOC) and the Internal Revenue Service (IRS), evaluate similar, but not necessarily identical, factors in order to determine whether a joint employment relationship may exist.

Since David Weil’s confirmation as administrator of the DOL’s Wage and Hour Division, he has vocalized his intent to focus enforcement in this area. In addition, given the popularity of staffing companies, other governmental agencies such as the EEOC and state unemployment insurance agencies have focused on these issues as well.

Accordingly, companies may want to exercise care in selecting staffing agencies, supervise such agencies to ensure the agencies are complying with all applicable requirements, and carefully review any agreement governing the relationship with staffing companies.

Hedley Lawson, Contributing Editor
Managing Partner
Aligned Growth Partners, LLC
(707) 217-0979