Temporary Employees: Are Employers Obligated to Check Up on Employment Agencies?

We have two main types of nonemployee workers: temps (who usually work just a few days or weeks) and leased employees (who work basically full time). In both cases, we pay a fee to the agency and the leasing company, and they handle all the employment matters, including hiring, payment, and benefits. My question is this: to what extent—if at all—are we responsible for ensuring that the temp and leasing firms are in compliance with federal and state laws? We have reason to believe that one of our leasing companies is discriminating in its hiring process. What is our liability? What should we be doing to check up on these companies?
— Anonymous

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Many employers are forced to deal with this issue at one time or another. Thomas N. Makris of Pillsbury Winthrop Shaw Pittman sets the record straight.

You are right to be concerned! Failure to manage your indirect workforce can result in unexpected liability from several directions.

First, when leasing employees or using temporaries, you may be considered a ‘joint employer.’ The tests for joint employer status generally focus on the degree of control you exercise over the employee and the degree to which you make employment decisions regarding the worker. If it is determined that you are a joint employer, you may face liability for a variety of claims including wage and discrimination claims.

Second, if you rely heavily on a leasing agency to manage a portion of your work force, the leasing agency may be found to be acting as your agent. If that happens, you may be liable for many of their activities under traditional agency laws, which generally make the principal (your organization) liable for the acts of the agent (the leasing agency).

Third, even if you are not a joint employer, you may have responsibilities to the temporary or leased employee.

For example, although you may not have primary responsibility for providing family and medical leave, you may be obligated to accept a returning employee who has been given leave by the primary employer.

Fourth, the leasing agency’s employment policies may affect your other employees. For example, if a leased employee sexually harasses one of your other employees, your exposure will be increased if the leasing agency does not have effective harassment policies, including training, particularly if you knew about their failure.

In the example you raise about discrimination in hiring by the leasing agency, your exposure to liability depends on the nature of the relationships. At one extreme, if the employee in question was hired by the leasing agency to serve a number of its clients and is only temporarily placed with you some time after being hired, your exposure is minimal. At the other extreme, if the individual was hired to fill a specific position in your company with the leasing agency serving as your agent in the hiring process, you are very likely to be liable for any discrimination by the leasing agency in the process.

Makris offers employers some tips for managing these issues:

1. Know who you are dealing with. Interview the leasing agency in detail about its employment practices and check the agency’s references. For example, make sure that the leasing agency has an effective harassment prevention program that includes training and a reporting procedure and that the agency follows all wage and hour laws.
2. Insist on a contract that protects your interests. Your agreement with the leasing agency should clearly spell out the areas in which the agency is responsible for complying with employment laws. It should also make the leasing agency responsible for defending you if you are sued because the agency didn’t do what it promised and for paying any judgment.
3. Work with financially strong agencies. Having the agency agree to indemnify you does no good unless it has the resources to stand behind the commitment.
4. Look at the leasing agency’s insurance coverage. Workers’ compensation is a must, and employment practices liability insurance is very helpful. At a minimum, you should require documentation of the agency’s coverage. Better still, you should be named as an additional insured.
5. Create an “employee handbook” for temps and leased employees, and provide at least a brief orientation. There are obviously many topics in your employee handbook that you don’t need to cover with temps. However, it is critical that they have information about your antiharassment and antidiscrimination policies (including harassment reporting procedures within your organization), safety policies, the operational policies that impact their work, and a variety of other topics. It is also important that temps and leased employees receive written notice that they are not eligible to participate in your employee benefit programs.
6. Cover proprietary information. If your business is concerned about proprietary information and inventions, make sure those topics are covered in your contract with the leasing agency, and require that each temp and leased employee signs a proprietary information agreement designed specifically for these individuals.

Thomas N. Makris is counsel at the Sacramento office of law firm Pillsbury Winthrop Shaw Pittman.