The business world is in the midst of rapid transformation driven by globalization, e-commerce, and an array of technological advances. One aspect of this evolution that has not received much attention until recently is the trend away from the classic employer-employee relationship that has characterized our economy since the Industrial Revolution. Previous generations of workers were likely to experience only long-term, rigidly hierarchical employment that was long on security but short on flexibility. Today, the work at many firms is being done by workers who do not fit the conventional model. They may be leased employees, freelancers, independent contractors, part-time or temporary employees, or an amalgam of these or other concepts to suit the needs of today’s businesses. Collectively, such workers have come to be known as the contingent workforce.
The growth of the contingent workforce raises some new legal issues concerning employer compliance with a range of federal and state statutes, including the Fair Labor Standards Act, the Internal Revenue Code, the Age Discrimination in Employment Act, the Employee Retirement Income Security Act (ERISA), and state laws on workers’ compensation and unemployment insurance. In resolving these issues, our courts often distinguish an “employee” from other workers, using criteria that were first developed long before there was cyberspace or a “new economy.”
Generally, the defining characteristic of an employer-employee relationship is the right of the hiring party to control the manner and means by which the product is accomplished. Among the factors relevant to this analysis are: the skill required of the worker; the source of the instrumentalities for accomplishing the work; the location of the work; the duration of the parties’ relationship; whether the hiring party has the right to assign new projects to the worker; the extent of the worker’s discretion over when and how long to work; the method of payment; the worker’s role in hiring and paying assistants; whether the work is part of the hiring party’s regular business; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the worker.
Determining that a contingent worker is an “employee” by weighing the various factors will not necessarily be decisive for purposes of statutory rights or benefits. For example, in order to be entitled to retirement benefits that are protected under ERISA, a person must be an employee and be entitled to receive retirement benefits under the language of the employer’s retirement plan. In a recent case, a computer programmer found work with a major corporation when she answered an ad placed by an independent staffing company. Her only written contract, which described her as an “independent contractor,” was with the staffing company. She worked for the corporation under renewable one-year contracts between the corporation and the staffing company that governed her compensation and length of employment. Eventually, the programmer was told that her services were no longer needed.
According to a federal appeals court, the programmer had a legitimate argument that she was an “employee” of the corporation for purposes of retirement benefits despite the fact that she was leased to the corporation by the staffing company. She still did not come under the protection of ERISA, however, because the corporation’s plan was generally restricted to “regular employees,” defined in the plan as excluding temporary employees and including only employees working standard hours per week and weeks per year. In addition, other parts of the plan explicitly excluded leased employees.
If the law being interpreted is remedial in nature, some courts have defined the terms “employer” and “employee” even more expansively than they would under traditional criteria. For purposes of enforcement of the overtime provisions in the Fair Labor Standards Act, a federal appellate court ruled that temporary workers were “employees” of two temporary employment agencies that provided temporary workers for other businesses. Some of the same factors used in other contexts were relevant, but the court applied a broad “economic reality” test to all of the circumstances considered together. The bottom line is that the worker generally will be regarded as an “employee” if he or she is economically dependent on the “employer.”
In the above case, the temp agencies did not exercise direct supervision of workers at their client companies, but the agencies were solely responsible for hiring the workers and setting their work schedules. The agencies also determined the rate and method of payment, maintained employment records on the workers, and reserved the right to intervene if problems arose as to job performance. The workers were held to be employees of the temp agencies and could assert a right to overtime pay against them, notwithstanding that the agencies had required all job applicants to sign a “contractor agreement” that expressly stated that the workers were not employees of the agencies. Moreover, the fact that in the same litigation the workers were claiming to be employees of the client companies did not hurt their case. More than one “employer” can be found to have obligations to the same workers if the applicable test is met for each person or entity claimed to be an employer.