Avoid Co-Employment Risk – Don’t Get Sued

Last updated Nov 7, 2023  |  Published on Oct 3, 2019
by Anna Bielawski

The issue of co-employment and worker misclassification came into the national spotlight in the late 1990s because of Vizcaino v. Microsoft.

The lawsuit, which was filed by a group of independent contractors who claimed they were common law employees, accused the company of improperly withholding benefits.

Microsoft eventually settled the lawsuit after the Internal Revenue Service found they misclassified the temporary workers according to the 20-factor test for classifying employees. While the 20-factor test is no longer used line by line, the principles behind it still stand and support the newly revised Common Law Rules.

The lawsuit and settlement have had a lasting impact on how organizations prepare for and hire contract labor.

Fast-forward to today—as organizations begin tapping into the gig economy, understanding co-employment and the associated risks is more relevant than ever.

Especially since the State of California recently approved a law changing the policies and definitions for how companies like Uber and Lyft classify their independent contractors.

What is co-employment?

Co-employment occurs when two or more employers have legal responsibilities for the same employee or group of employees (usually a staffing agency and their client).

With temporary workers, liability may arise when the client performs a role that the staffing firm should perform—important tasks such as withholding applicable taxes, maintaining payroll or employee records, and resolving employee grievances or complaints.

As seen in the Microsoft lawsuit, the independent contractors argued that since they were treated like permanent employees, they should have been eligible for specific benefits only offered to their permanent counterparts.

Outlining separate hiring and employment policies for temporary and permanent employees is not only helpful, but crucial to setting expectations for all parties.

How does co-employment liability happen?

If a worker is hired by a staffing agency to fill an open position at a client company and is onboarded by the client, instead of the staffing firm, the client is treating the worker the same way as it would a permanent employee.

This action, in itself, could result in a lawsuit.

Specific to the Microsoft case, the independent contractors were treated as if they were permanent employees.

Microsoft required them to work on-site, paid for office supplies, and assigned them to teams. They were supervised by the same managers as permanent employees, with the same working hours. 1

On the other hand, economic advantages of flexible staffing outweigh co-employment risks, which can be minimized with proper management.

How can co-employment risk be minimized?

So how do you avoid co-employment?

The simplest way to mitigate risk associated with co-employment is to position the staffing agency as the primary employer for temporary employees.

This means they have all employer responsibilities such as salary negotiation, healthcare coverage, HR issues, and terminations. The primary responsibilities of client companies are to establish length of assignment and supervise, as well as direct their day-to-day work.

Client companies must create clear differences between their processes for temporary workers and permanent employees to protect themselves from co-employment liability and associated legal consequences.

Before a client company selects a staffing agency, it’s important to ensure the agency is knowledgeable about labor laws and mitigating the risks associated with co-employment. Some agencies provide an additional Employer of Record service to further reduce co-employment risks, including:

  • – Pre-screening and running all background checks.
  • – Enforcing clients’ internal practices and policies for differentiating permanent employees.
  • – Incorporating staffing companies who provide employee benefits, and not using 1099 independent contractors.
  • – Mandating insurance coverage such as unemployment, workers compensation, and general and professional liability.
  • – Regularly scheduled employee reviews.
  • – Outplacement and termination of employees.
  • – Tax reporting and delivery of W-2s.
  • – Time and expense tracking with a cloud-based Vendor Management System.

As organizations continue to increase their use of staffing agencies and independent contractors, it’s important for them to engage in proper hiring and management practices to avoid pricey lawsuits.