Remember Microsoft: The Need for Risk Management as to Contract Employees

The number of workers supplied to businesses by staffing agencies has been steadily increasing for some time. According to the American Staffing Association, “[e]very day staffing businesses send three million employees to work in America’s offices, factories, hospitals, warehouses and other worksites –virtually every place that people work, staffing employees are on the job.” The Bureau of Labor Statistics predicts this number will reach four million by 2022.

The reasons for a company to forego regular employees in favor of staffing agency employees include flexibility, time, cost and expertise. For many companies, these benefits offset the mark-up charged by staffing agencies.

As companies have learned over the years, however, a staffing agency arrangement does not necessarily determine who the legal employer of a contract worker is. Depending upon the situation, a contract worker may be legally regarded as an employee of the staffing agency, an employee of the host company, or both. If the host company is the contract worker’s sole or joint employer, it is not necessarily shielded by the staffing agency arrangement from potential liability to the worker under applicable employment laws. Furthermore, if the host company is the worker’s sole or joint employer, it must include the worker when determining whether it employs the requisite number of employees to be subject to certain employment obligations.

One of the more infamous examples of the legal risks faced by companies who use staffing agency employees is Vizcaino v. Microsoft Corp., a federal class action brought in 1992 alleging improper denial of benefits under the software company’s Employee Stock Purchase Plan (“ESPP”). The claimants, however, were not regular employees of Microsoft. Instead, the potential class was made of thousands of workers classified by the company as independent contractors (sometimes called freelancers) or temporary agency employees (also called temps). Protracted litigation resulted in a court opinion that the freelancers and temps were common law employees of Microsoft, which was sufficient to be participants in the company’s ESPP. In 2000, Microsoft agreed to pay $97 million to settle the class action.


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