HR Management & Compliance

Leased And Temporary Workers: Why You Could Be On The Hook For Unintended Benefits; Action To Take Now

Supplementing your regular workforce with staff provided by an employee leasing company has become an increasingly popular way to keep administrative and benefit costs down and maintain labor flexibility. Many who use leased workers and long-term agency temps consider themselves immune from the risky misclassification problems that have plagued employers who use independent contractors. But an important new decision casts serious doubt on this perception.

A federal appeals court has recently ruled that, in some circumstances, workers who are hired and paid by a leasing company might still legally be considered your employees. This means you could be liable for past and future employee benefits you never intended to offer. To protect yourself, you need to take action immediately.

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Leasing Company Provides Workers

The recent case was brought by 13 workers at Pacific Gas & Electric Co. in San Francisco. They started at PG&E as employees of various outside staffing firms and were classified as temporary or leased workers. They were trained by PG&E, used PG&E equipment and were provided with PG&E business cards and letterhead. The staffing agencies, however, continued to pay them.

After several years, PG&E changed the arrangement, transferring day-to-day control over the workers to one of the employment agencies, Stafco. PG&E then stopped allowing the workers to use its business cards or to otherwise hold themselves out as its employees.

Entitled To Employee Benefits?

Most of the leased employees were eventually laid off. They sued the utility, arguing that they should be considered PG&E employees entitled to health, retirement and severance benefits. But PG&E countered that the workers were Stafco employees, plus they weren’t eligible to receive PG&E benefits because most of its plans specifically excluded leased workers.

When Leased Workers Are Regular Employees

A lower court agreed with PG&E and threw out the workers’ case, but the Ninth Circuit Court of Appeal, which covers California, reversed the decision. The court first reviewed the Internal Revenue Code’s definition of “leased employees.” The current version of the Code essentially says leased employees are: 1) non-employee workers; 2) who work for you for more than one year; 3) are supplied under an agreement between you and a leasing company; and 4) are under your control.

The court concluded that under the IRS definition, some workers who you believe are leased employees could in fact be “common law” employees, and therefore fail part one of the leased employee definition. And if they are common law employees, they may be entitled to benefits.

20-Factor Test

To determine whether someone is a common law employee, you must consider 20 factors, including how much control you retain over their work, who provides their equipment and tools, where the work is performed, how long they have worked for you, how much discretion they have over hours and time of work, how they are paid, and whether and from whom they receive employee benefits. The problem for employers is that many leased workers will appear to be regular common law employees under these criteria.

The appeals court sent the case against PG&E back to the lower court to determine whether the workers fall within the definition of employees under the 20-factor test. If they do, they will be entitled to participate in PG&E’s health and retirement plans.

Precautions To Take Now

As more companies turn to contingent workers such as independent contractors, temps and leased employees, the concern is growing that employers will find themselves facing benefit claims by these employees. And depending on the number of people involved, the potential cost could be enormous. In fact, the PG&E case was decided by the same court that previously ordered Microsoft to pay retroactive benefits to scores of improperly classified independent contractors.

Here are two important steps to take to protect yourself:


  1. Review benefit plans. Although PG&E’s benefit plans specifically excluded leased employees, that’s not enough according to employee benefits attorney Kathleen Meagher with the law firm of Landels, Ripley & Diamond in San Francisco. While it’s legal to exclude independent contractors and leased employees from your plans, you need to be more detailed in defining exactly who’s covered and who isn’t.

    Meagher says you should clearly state that the plan includes only workers who are listed on your payroll as regular employees. Add that the plan specifically excludes individuals whom you have designated as independent contractors, agency temps or leased employees, even if a court later decides you misclassified the workers for tax purposes. Make sure your benefit documents, including 401(k), retirement, disability, health, life insurance and stock purchase plans, are clear about who can participate, and never refer to “employees” without defining exactly what that means.

    Keep in mind, however, that your retirement and stock purchase plans can lose their favorable tax status if you exclude certain classes of employees, so talk to an expert before taking action.


  2. Require contingent workers to waive benefits. You may also gain some protection by having all contingent workers sign an agreement acknowledging that they are not your employees and won’t receive benefits. They should also agree that if it is ever determined that they are employees, they waive any right to recover employee benefits for the period during which you treated them as leased or contract workers.


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