Employers utilizing staffing agencies should be on high alert given the Department of Labor’s (“DOL”) recent investigations targeting these arrangements. Specifically, the DOL has been actively investigating businesses that contract with certain types of staffing agencies that rely on placing 1099 independent contractors for labor. Due to unprecedentedly tight labor markets, employers increasingly rely on staffing agencies to provide them with supplemental workers necessary to run their businesses. The businesses contracting for staffed labor often assume that the staffing agency is following the law and will take responsibility for any liability related to the workers they place.  Unfortunately, all too often, this is not the case. In many situations, staffing agencies treat the workers they place as independent contractors, which can result in a misclassification finding when those workers are assigned a routine schedule at a facility or in another office setting and subject to supervision.

The most troubling development regarding the staffing agency and staffed business dynamic is that the DOL has recently been targeting the staffed entity for liability associated with non-payment of overtime due to the staffing agency’s misclassification of the workers as independent contractors. In other words, the DOL is attempting to hold the staffed businesses accountable for the staffing agency’s alleged misclassification. For example, the DOL recently sued a healthcare management business for a staggering $19 million allegedly owed in back wages as a result of unpaid overtime to workers the company obtained from a staffing agency that failed to pay the overtime.  The staffing agency, which was not named in the lawsuit, did not pay overtime to the workers based on the position that they were independent contractors and not employees.

The legal theory for holding a staffed business liable for the unlawful pay practices of the staffing agency is called “joint employment.” Joint employment liability may exist when two or more employers share control or supervision over a worker, resulting in legal obligations and liabilities for all parties involved. A joint employment finding generally results in joint and several liability for all entities or individuals held to be joint employers. A joint employment finding may occur under a variety of employment-related laws including wage and hour, workplace safety, union organizing and anti-discrimination. Joint employment claims are often brought as class actions, which focus on large groups of workers with the potential for substantial recovery. Independent contractor misclassification cases are frequently brought as class actions with the common thread being the theory that the classification decision was incorrectly applied to a group of similarly situated workers. Similarly, the DOL will generally focus their investigation on all allegedly misclassified independent contractors rather than certain individuals.

Staffing agencies typically recruit, screen, and hire workers, and then assign them to work at the staffed employer's preferred work site. However, in some cases, staffing agencies may classify these workers as independent contractors instead of employees. Likewise, the staffed business also treats the worker as independent contractors even when the characteristics of an employment relationship may exist, such as the worker being subject to the employer's control, supervision, and direction. When this happens, the staffed business may be subject to misclassification exposure based on a joint employment theory of liability. 

The takeaway is that an employer should carefully vet any staffing agency providing supplemental workers to determine how the staffing agency classifies the workers and confirm the business is legally compliant. These workers may be entitled to various legal protections, such as minimum wage, overtime pay, workers' compensation, medical insurance and unemployment benefits. If these workers are misclassified as independent contractors, the staffed business may be exposed to legal claims (usually on a class and/or collective basis) and face significant financial damages. Employers should also carefully review the indemnification and other provisions of the contract entered into with staffing agencies to ensure the staffing agency takes sole responsibility for ensuring the staffed workers are treated in a legally complaint manner.