Workers in California benefit from some of the most stringent employment laws in the country.  They receive a wide variety of valuable protections, including minimum wages and overtime pay, meal and rest periods, and laws prohibiting retaliation, discrimination, and harassment.  In recent years, to increase the number of workers protected by these laws, Governor Gavin Newsom signed Assembly Bill 5 (AB 5) which codified and significantly expanded when workers should be considered “employees” under the California Labor Code and the California Unemployment Insurance Code.  While there are exceptions for some specific industries, AB 5 has significantly minimized most employers’ ability to designate workers as “independent contractors.” As a result, when possible, some employers are using “temporary workers” through staffing agencies when they need temporary assistance. Unfortunately, the use of temporary workers can present numerous legal traps and pitfalls for employers to unknowingly violate California law.

Can a temporary worker be classified as your employee? 

Employers often mistakenly believe they can avoid paying payroll taxes, obtaining workers’ compensation insurance, and providing employee benefits when they hire temporary workers from a staffing agency.  However, merely hiring a temporary worker from a staffing agency is not sufficient to protect employers from those potential obligations.  Under many circumstances, the employer and the staffing agency can be considered “joint employers” of the worker.  Several factors are considered when determining a “joint employer” situation.  Those factors include the number of full-time employees the employer currently employs, the number of temporary workers being utilized and whether the employer is training, supervising, or disciplining temporary workers.  Further, if the staffing agency misclassifies a worker as an independent contractor, and not as its employee, the worker might be able to assert a misclassification claim against both the staffing agency and the contracting company.

What types of potential liability is my business facing?

By engaging staffing agencies to provide temporary workers, and failing to meet California’s employment laws, employers potentially expose themselves to the following liabilities:

1. Harsh state and federal tax penalties.
2. Civil liability from administrative actions and lawsuits filed by workers.
3. Statutory penalties, unpaid wages and employee benefits.
4. Mandatory attorneys’ fees and litigation costs.

Additionally, there are also the intangible costs of the loss of time and productivity from being dragged into litigation.

How can I protect my business?

Significantly, most employment claims are not covered under commercial general liability insurance policies.  Further, coverage for temporary workers under employment practices liability insurance is not a given depending upon the specific language within the policy.  As a result, the employer may have to pay the defense costs and any potential settlement or judgment out of pocket.  Accordingly, an employer wishing to minimize its potential liability should take the following steps to ensure that the temporary worker remains the employee of the staffing agency only:

1. Do not train, supervise, discipline or dismiss the worker. These are the responsibilities of the staffing agency, not the contracting company.
2. Confirm that the staffing agency classifies its workers as its employees unless they clearly meet the definition of an independent contractor.
3. Require evidence that the staffing agency meets all wage and workers’ compensation requirements at the outset and throughout the worker’s engagement.
4. Discuss with your broker what coverage, if any, is afforded under any employment practices policy you may have for claims by temporary workers.

Finally, given the practical difficulties of ensuring the foregoing, the employer is encouraged to negotiate and include a defense and indemnity provision in its contract with the staffing agency.  While this may not prevent your business from being sued by a temporary worker, it can provide a valuable risk transfer device by shifting potential liability and defense costs to the staffing agency.

Matthew Stohl, Member

mstohl@bph-law.com

www.bph-law.com

Matthew Stohl serves as general corporate counsel for several clients, providing risk assessment and management support as well as reviewing, drafting and negotiating contracts.  In addition, his business litigation practice is primarily focused on construction defect matters and labor and employment issues.