Staffing Firms and Payrolling Vendors Beware: You Can Be Held Liable for the Acts of Your Client Company under Title VII of the Civil Rights Act

Jason D’Cruz

By: Jason D’Cruz, Partner at Morris, Manning & Martin, LLP and Tali Hershkovitz, Associate at Morris Manning & Martin, LLP

Through application of the joint employer doctrine, payrolling vendors, staffing firms, and other human capital suppliers may be held liable for the actions of their client companies under Title VII of the Civil Rights Act of 1964 (“Title VII”). This article summarizes the potential liability and provides guidance to minimize the risk.

Title VII and Joint Employment

Title VII prohibits employers from discrimination against “any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s race, color, religion, sex, or national origin.” The statute defines the term “employer” as “a person engaged in an industry affecting commerce who has fifteen or more employees for each working day in each of twenty or more calendar weeks in the current or preceding calendar year,” and the term “employee” as “an individual employed by an employer.”

While payrolling vendors and staffing firms are generally aware that Title VII applies to their own workers, these entities generally are not aware they also may face liability for claims brought by their workers who are assigned to perform services for client companies even if the alleged wrongdoing was committed by the client company.

Joint Employment under Title VII

Fact: In most situations, a worker payrolled or supplied by a payrolling vendor or staffing firm, respectively, to a client company (1) is protected by Title VII against the actions of both the client company and the payrolling vendor or staffing firm, and (2) the payrolling vendor or the staffing firm can be held liable for the actions of the client company.

Fact: The label used to describe the worker in the employment contract or the contract between the contracting entities is not determinative. In other words, it does not matter if, for example, the employment contract states that the worker is employed solely by the staffing firm or payrolling vendor.

In order to determine whether a payrolling vendor or staffing firm can be held liable for the actions of the client company, all aspects of the worker’s relationship must be considered to determine whether a joint employment relationship exists, including whether:

a) The payrolling vendor or staffing firm (hereinafter, the “Supplier”) or the client company has the right to control when, where, and how the worker performs the job;

b) The work requires or does not require a high level of skill or expertise;

c) The Supplier or the client company rather than the worker furnishes the tools, materials, and equipment;

d) The work is performed on the premises of the Supplier or the client company;

e) There is a continuing relationship between the worker and the Supplier or the client company;

f) The Supplier or the client company has the right to assign additional projects to the worker;

g) The Supplier or the client company sets the hours of work and the duration of the job;

h) The worker is paid by the hour, week, or month rather than for the agreed cost of performing a particular job;

i) The worker has no role in hiring and paying assistants;

j) The work performed by the worker is part of the regular business of the Supplier or the client company;

k) The Supplier or the client company is itself in business;

l) The worker is not engaged in his or her own distinct occupation or business;

m) The Supplier or the client company provides the worker with benefits such as insurance, leave, or workers’ compensation;

n) The worker is considered an employee of the Supplier or the client company for tax purposes (i.e., the entity withholds federal, state, and Social Security taxes);

o) The Supplier or the client company can discharge the worker; and

p) The worker and the Supplier or client company believe that they are creating an employer-employer relationship.

Each factor does not need to be present for a joint employment relationship to exist. Similarly, no one factor is controlling or necessarily carries more weight than any other factor. Federal courts take into consideration the totality of the circumstances when making a determination regarding joint employer liability.

Illustration #1. A staffing firm hires Laura Smith and sends her to perform a long term accounting project for a client. Her contract with the staffing firm states that she is an independent contractor. Smith retains the right to work for others, but spends substantially all of her work time performing services for the client, on the client’s premises. The client supervises Smith, sets her work schedule, provides the necessary equipment and supplies, and specifies how the work is to be accomplished. Smith reports the number of hours she has worked to the staffing firm. The payrolling vendor or staffing firm pays her and bills the client for the time worked. It reviews her work based on reports by the client and has the right to terminate her if she is failing to perform the requested services. The staffing firm will replace her with another worker if her work is unacceptable to the client.

In these circumstances, despite the statement in the contract that she is an independent contractor, both the staffing firm and the client are likely joint employers of Smith.

Illustration #2. An individual complainant files a charge against ABC Corp. alleging that she was subjected to religious harassment. Under Title VII, which protects religious harassment, an employer must have at least 15 employees in order for Title VII’s protections to apply its employees. ABC Corp. has 13 employees and five employees assigned by a temporary employment agency, who are deemed jointly employed by ABC Corp. and the temporary agency. Because those 5 temporary employment agency employees are jointly employed, thus bringing the total employee count from 13 to 18, the individual complainant will have the option to file a complaint under Title VII. By way of contrast, if those 5 employees were not jointly employed, the individual complainant would not have the ability to sue ABC Corp. under Title VII.

Single/Integrated Employment

The single employer doctrine is a related mechanism for holding one entity liable for the actions of another, but which differs from joint employment. Under a joint employer analysis, each employer has control over the employees at issue, while under a single employer theory two separate entities are considered as one employer.

To determine whether separate entities should be treated as a single employer for purposes of Title VII liability, federal courts focus on four factors as set forth in the EEOC Compliance Manual: (1) the degree of interrelation between the operations, (2) the degree to which the entities share common management, (3) centralized control over labor relations, and/or (4) the degree of common ownership or financial control over the entities. In addition, courts have applied external considerations to assist with a final determination, including: 1) sharing of management services such as check writing, preparation of mutual policy manuals, contract negotiations, and completion of business licenses; 2) sharing of payroll and insurance programs; 3) sharing use of office space, equipment, and storage; 4) operating the entities as a single unit; 5) whether the same individuals manage or supervise the different entities; 6) whether the entities have common officers and boards of directors; 7) whether the entities share a personnel (human resources) department and whether inter-company transfers and promotions of personnel are common; 8) whether the same persons make the employment decisions for both entities; 9) whether the same person or persons own or control the different entities; and 10) whether one company owns the majority or all of the share of the other company.

Illustration #3. Complainant John Rogers applies for a position with ABC Corp., is rejected, and files a charge alleging sex and age discrimination under Title VII. ABC Corp. is a computer training center. Jane Smith is its president and sole proprietor. She is also the president and sole proprietor of three other computer training centers, and of Computer Training, Inc. (CTI), which manages ABC Corp. and the three other centers. Smith is personally involved in the management of each of these companies and makes personnel decisions for the training centers in her capacity as president of CTI and as president of the individual centers. CTI pays the bills for each of the training centers, handles payroll, and negotiates contracts for the centers. CTI created a personnel handbook for use by each of the training centers. The profits of the individual training centers are pooled into one bank account in the name of CTI, which maintains a centralized management account allowing the profits of more successful training centers to cover the losses of less successful ones.

Under these circumstances, ABC, CTI, and the other training centers are likely an integrated enterprise, and should be considered a single employer for purposes of coverage and liability under Title VII.

How to Avoid Liability

Employers should closely review the factors for establishing both joint and single employment liability under Title VII. This non-exhaustive list will help minimize the risk:

1. Establish Relationship in Contract. Any contractual relationship should clearly establish from the beginning that the intended employing entity will be solely responsible for the management of its own employees. There should be a specifically defined scope of the contractual relationship, which includes which party will provide materials, supplies, or facilities, and an explicit statement that the employing entity will set qualifications for its employees. It is good practice to add indemnification language to any such contract, where the intended employing entity agrees to indemnify the non-employing entity for any liability associated with the treatment of its employees. All discrimination and harassment charges and claims should be included in this provision.

In addition, non-employing entities should also require that the employing entity maintain an insurance policy, and add the non-employing entity as an additional insured party under the policy. Written notice should then be required for any modification or cancellation of the policy.

2. Minimize Control in Practice. Employers should closely evaluate the degree of control they have over other entities’ employees, and make an effort to minimize any such control. This includes the ability to hire, fire, or discipline employees; adjust or pay compensation and benefits; and direct and supervise employee performance. The greater the degree of control an employer has over the other entity’s employees, the greater the likelihood that employer will be held responsible for any claims of discrimination.

3. Stay Vigilant. The most common sense preventive measure is to pay attention, listen to complaints, and address them immediately. Don’t let little issues grow into big ones!

4. Training can Minimize the Number of Claims. The second most common sense preventive measure is to adequately train employees on harassment and other discrimination issues under Title VII. This training, if done correctly and repeated at appropriate intervals, will go a long way to create a culture that recognizes inappropriate behavior and avoids such behavior.

Legal Disclaimer – The contents of this article are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.