Volume 36, Issue 10, October 2001

The Contingent Workforce
        New Dangers Ahead
by David Barron

The use of contingent workers, temps, leased employees and independent contractors is a practice so new that we have yet to agree upon a single name to describe all supplemental workers. Regardless of how employees are referred to, they are called upon with greater frequency and by more employers. Initially, employers feared that the presence of second-class employees would erode workplace morale. That concern has in large part been dispelled as three quarters of all manufacturers use some sort of temporary help.

The boom in temporary workers was initiated by the cost savings of the practice. Benefits are not paid, the cost of new hires is less and wrongful termination claims are diminished. But that is changing. The increased risks of using contingent workers will probably not be perceived by most employers as being so great as to cause them to eliminate the use of temporary workers. But, the risk has increased to the point that those who use contingent employees must exercise greater caution.

A Look at Micrsosoft
The highly publicized Microsoft case was the first battle in the growing attack upon employers’ characterizations of their workers as contingent and not regular employees. Microsoft did a good job in handling employee relations. It also listened to its lawyers and followed their advice. That is why when Microsoft was found to have classified its workers incorrectly, the decision chilled employers everywhere who had contingent workers. The Microsoft case was not one of a big name company making a silly mistake. No, Microsoft had done its homework well. It had followed the guidelines given to it, and the company still lost. 

The Microsoft litigation involved not one, but many different cases. Microsoft’s problems began with the Internal Revenue Service (IRS). The IRS asserted that freelancers were not really independent contractors. According to the IRS, Microsoft should have withheld taxes and made employers’ social security and Medicare payments on behalf of the freelancers. After an investigation, and to avoid further litigation, Microsoft settled the case. In hindsight, that may have not been the best decision. Possibly Microsoft had no choice, but settlement did not end matters. 

Suit was soon brought on behalf of the freelancers asserting that the freelancers should have been able to purchase company stock at the employee discounted rate and allowed participation in the section 401(k) pension plan in which Microsoft matched some of the employees’ contributions. The IRS settlement was found not determinative of the employment relationship. But, when the litigation was concluded, Microsoft found itself to have been deemed the employer of the freelancers from the outset of their hire. The price tag was not cheap. Up to 12,000 freelancers were entitled to benefits. The total cost is estimated at $97 million dollars.

Checking Out Your Workers
Remember the best way to evaluate your workforce is to step back and look at your contingent workers as would an agency or court. What aspects of their work make them look like employees as opposed to independent contractors (if the latter is what you wish)? Of these factors, what can you change? If you are using leased employees, what factors indicate a joint employer relationship? Again, of these factors, what can you change? Contractor-supplied employees should be different in the following specific regards: 
    • Different uniforms, hard hats, applications and personnel forms;
    • Different personnel policies, including safety, drug testing and disciplinary policies;
    • Contract employees should not be included in company functions, such as Christmas parties, picnics, etc.;
    • The company should not assign work directly to contract employees, but instead to their supervisors;
    • The company should never be involved in disciplinary actions, terminations or hiring decisions of a contractor; and 
    • Whenever possible, the contractor should have a supervisor on the company’s premises.

Risk of Injury Lawsuits
Keeping contingent workers has some collateral effects. First, and foremost, you are not covered by workers’ compensation from suits brought by employees of another employer while working on your premises. In other words, contractor-supplied employees can file a lawsuit if they slip and fall, strain their back or suffer a fatality while on your premises. Although an injured contract worker may be able to claim workers compensation benefits through his employer, these benefits will pale in comparison to the prospects of seeking thousands or millions from your company. Moreover, placing contract workers side-by-side with your employees often leads to accidents which can be blamed upon the negligence of one of your company’s employees. These negligence lawsuits can be difficult to defend, especially if a serious injury is involved.

The best method of protecting yourself against litigation arising from these types of injuries is to insist upon legal protection in any agreements entered into with contractors working on your premises. Contractors should be required to indemnify you from any and all claims made by their employees, especially injury claims. You should require that they show proof of both workers compensation and general liability insurance. You should also demand that you be named as an additional insured under their insurance policies so you have some assurance that, in the event litigation arises, the company will be able to meet its contractual obligations. If you do not have these contractual protections, or do not diligently verify that your contractors have the wherewithal to meet their obligations, you are rolling the dice hoping a serious injury will never occur.

The rules of the game have changed. Yet, there are still significant advantages to using contingent workers. However, the potential liability of this practice has increased and an employer must take precautions not necessary before an incident in order to keep that increased risk at tolerable levels. 


David Barron is an attorney at Alaniz and Schraeder in Houston. He represents employers in employment-related matters.


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