Using an outside staffing agency

What you need to know

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Using a staffing agency for certain job categories at an auto dealer, i.e., porters and janitors, may be a convenient and efficient way to meet staffing needs and screen potential future employees without the administrative burdens of hiring and payroll. But using a staffing agency does not create a free pass for the dealership. Existing law allocates substantial employment practices compliance burdens equally to staffing agencies and their clients, especially where a “joint employer” relationship exists. Here are some issues to remain mindful of:

Joint employer liability may exist for businesses who use staffing agencies where certain factors are met.

When a staffing agency provides employees to render services for another business, that business may be deemed a “joint employer” along with the staffing agency, which means that the client- business is potentially liable as an employer for employment-related claims of the workers. The test to determine whether a business is a joint employer is highly fact-specific. The primary consideration for this test is whether the client business has ' "[t]he right to control and direct the activities of the alleged employee or the manner and method in which the work is performed, whether exercised or not. . . ." ' Kowalski v. Shell Oil Co. (1979) 23 Cal.3d 168, 175. After this primary factor, further secondary factors are also considered, including:

  1. whether the client-business paid wages to the employee,
  2. whether the client-business had the power to discharge the employee,
  3. whether the work performed by the employee was unskilled,
  4. whether the work tools were provided by the client-business,
  5. whether the work was part of the client-business’ regular business,
  6. whether the employee expressly or impliedly consented to a joint employment relationship,
  7. whether the parties believed they were creating a joint employment relationship, and
  8. whether the alleged special employment period was lengthy.

Kowalski, supra, 23 Cal.3d at pp. 176-177.

Similar factors (with emphasis on the level of control) are considered for the joint employment determination under both the Federal Fair Labor Standards Act and the National Labor Relations Act.

Applying these factors, a joint employer relationship may exist where the worker is working full-time on the dealership premises and is managed on an ongoing basis by dealership personnel, such as where dealership management directs, controls and evaluates the manner in which the worker performs services, the worker’s schedule and/or has input regarding the worker’s pay.

For some liability purposes, joint employer liability may automatically exist, regardless of these factors.

California Labor Code Section 2810.3 provides that any business entity that obtains workers from a labor contractor shares with the labor contractor all civil legal responsibility and liability for:

  1. payment of wages,
  2. ensuring that workers’ compensation coverage is maintained, and
  3. ensuring that the workplace meets Cal-OSHA standards for the workers supplied by the labor contractor.

Before this statute was enacted, employers generally could only be held liable for employment law violations committed by staffing agencies if they were a joint employer under the test set forth in the previous section. Now, for the areas referenced above, even if the dealer is technically not a joint employer under the law, it is treated as one.

But Section 2810.3 is only intended to cover arrangements where the client business uses the workers within its “usual course of business” and the workers perform labor within the client employer’s day-to-day business operations. Therefore, if a dealership uses workers from a labor contractor to wash or detail customer or inventory vehicles within the dealership’s usual business operations, Labor Code Section 2810.3 would apply. If, however, a dealership used a labor contractor to perform facilities repair work, that relationship would not be covered. This provision also exempts employers with a workforce of less than 25 workers and business entities with five or fewer workers provided by labor contractors at any given time.

Liability for discrimination/harassment.

Whether a contracting business is potentially liable to staffing agency workers for discrimination and/or harassment depends on whether an employment relationship exists as defined by the Fair Employment and Housing Act (FEHA). Under the FEHA, an employee may have one or more employers who are jointly liable for harassment/discrimination, and therefore, the employee could recover against either or both employers. For a party to be found liable as a joint employer under the FEHA, it must have the right to exercise certain areas of control over the employee. In one case, a woman employed by a staffing agency was assigned to work at the client’s location, where she was sexually harassed by the client’s employee. The Court determined that both the agency and the client could be considered her employers under the FEHA because she was sent by the agency to do work for the client and both had the right to exercise control over her. Mathieu v. Norrell Corp., (2004) 115 Cal. App. 4th 1174, 1183. The FEHA’s protections against harassment are even broader than its protections against discrimination in that its provisions pertaining to harassment expressly apply to “an employee, an applicant, an unpaid intern or volunteer, or a person providing services pursuant to a contract.” Government Code Section 12940(j)(1). As such, there is a relatively low threshold to meet for finding that an employment relationship exists between a client business and a staffing agency worker for discrimination and harassment claims. This is yet another reason why adequate harassment and discrimination training of all employees is critical.

Things to consider when using staffing agency

  1. Vet, audit and monitor. Before engaging a staffing agency, check their track record, including, if possible, inquiring into past litigation/claims history and liquidity/ financial soundness. Also, audit their employment compliance practices, including required policies/notices, payroll practices, employment documentation/records, safety programs and training. Then, during the relationship, continue to monitor the staffing agency’s compliance, including ensuring that their practices remain updated to comport with ongoing legal developments.
  2. Use a well-drafted contract that includes the following provisions:
    1. Indemnification, defense and hold harmless. An indemnification provision in a staffing agency agreement should state that the agency will be responsible to the client business for any damages/liability borne by the client business as a result of any acts by the staffing agency or its employees. The wording of these provisions is very important and should be done with advice of counsel.
    2. Proof of adequate insurance. The contract should require the staffing agency to provide proof of insurance, including but not limited to general liability, workers’ compensation, and if possible, EPLI coverage. However, the scope and amount of insurance coverage that should be required will vary based on the potential risks and exposure, which should be discussed with legal counsel.
    3. Warranties and representations. The agreement should include certain warranties and representations by the staffing agency, e.g., that an enforceable arbitration agreement be signed by every provided employee, document retention, compliance with all laws, etc. Obtain the assistance of counsel for adequate language for both the provision and the arbitration agreement.
    4. Individual guarantee. If the staffing agency is a sole proprietorship or there are concerns that the business may not be adequately capitalized to cover the potential liability arising from employee claims (especially in a full joint employer situation), you may consider obtaining a personal guarantee from the individual owner(s).
  3. Retain proper documentation. Although the staffing agency may be the primary (or only) employer of a worker, if the worker has reporting responsibilities/duties that are monitored by the dealer, the dealer should retain documentation relevant to the worker’s performance, attendance, training received and any incidents related to the worker. Any documents in a worker’s personnel file maintained by the staffing agency should only be accessible by others (including the dealer) on a need-to-know basis, and any documentation maintained separately by the dealer pertaining to the worker should also similarly be protected from disclosure and maintained securely and confidentially. Presumably, if the dealer is a joint employer, its rights to access to the worker’s primary personnel file are broader as they have greater control, interest and stake in the worker’s employment, however access should still be on a need-to-know basis. And access should not be assumed. Make sure the agreement includes a provision permitting access to the dealership on a need to know basis.
  4. Ending a worker’s assignment. If the dealer terminates the worker’s assignment, but the worker remains employed by the staffing agency does the termination of that particular assignment constitute a “termination” that could potentially give rise to a wrongful termination claim? This will once again be a fact-specific determination. If the dealer can establish that it is not a joint employer, that wrongful termination claim is less likely to succeed. But if the dealer took any action that influenced or affected the continuing relationship between the worker and the staffing agency, the worker could potentially claim that the dealer wrongfully interfered with his or her contract with the agency that adversely affected the workers’ future employment. To avoid any claim that the worker was expressly or impliedly promised an assignment of a certain duration, it would be helpful if the staffing agency had some signed documentation acknowledging that the worker had no expectation that any particular assignment will be of a certain duration, and that the worker’s assignment can be terminated at will. If the worker is a joint employee, he or she could have a better claim for wrongful termination, but damages would be limited if the staffing agency immediately reassigned the worker to another client business.

These issues underscore that using staffing agencies and contract labor does not relieve you of employment liability. Therefore, understanding your potential liability for contracting workers can help you avoid costly consequences and take pro-active measures, such as properly screening and monitoring staffing agencies. In addition, you should have vendor agreements with staffing agencies that set forth the agency’s obligations to follow the law and indemnify you for legal and financial liability resulting from the its failure to meet its obligations to the workers. Businesses using contracted workers should consult with legal counsel regarding potential risks and recommended practices.