More and more, construction contractors are using two new kinds of companies designed to reduce contractor responsibility for hiring, firing, and maintaining employee benefits. These new companies provide labor under a variety of arrangements, including leasing or assigning their own "permanent" employees to the contractor for the duration of the project or establishing a co-employment relationship. One type of labor provider functions as a co-employer with the contractor, and is often called a professional employer organization or "PEO." The other type is an independent contractor, which may advertise itself as a labor broker, labor contractor, labor-leasing organization, or something similar. (In this article, unless the context clearly states otherwise, such labor-providing companies will be called either "PEOs," when they are co-employers, and "labor brokers," when they are independent contractors.)
As co-employers with the construction contractor, PEOs generally accept certain employer rights and responsibilities. While the contractor retains rights and responsibilities of day-to-day production, the PEO, as the employer of record, pays wages, taxes, and maintains several employment records. The PEO may also provide workers' compensation coverage and employee benefits. In some situations, PEOs may maintain a more direct employer relationship, may address complaints, and may retain the rights to hire, reassign, and fire.
Contractors use PEOs and labor brokers for the following reasons:
- They may see a PEO as a way to provide "big-company benefits" to workers through the buying power of a larger employee base;
- They may use labor brokers because they lack working capital or cannot find labor elsewhere; or
- They may prefer that a third party manage their human resources paperwork.
Few contractors appear to understand the legal implications of using such companies, however. The increasing use of PEOs and labor brokers has resulted in significant litigation.
Status as an Employer
The law only recognizes two relationships between a business and its workers: the worker is either an independent contractor or an employee. Independent contractors are generally independent business owners who set their own hours, control the means and manner for completing work, work for more than one company, and have the right to hire and fire other employees to complete a project. On the other hand, employees work under the direction of their employer; they generally do not have the right to hire; they do not need business licenses (as opposed to professional licenses); and they have far less discretion in determining how their work is completed.
Independent contractors are not subject to prevailing wage laws. Employees of independent contractors, on the other hand, are subject workers — it makes no difference if they work for a prime contractor, a subcontractor, or a co-employer. If a prevailing wage law applies to a project, all employees engaged on the "site of the work" must be paid the applicable prevailing wage.
Whether an individual is an employee or an independent contractor depends on the agency and the law being interpreted. For example, the Department of Labor's test to determine independent contractor status under the Fair Labor Standards Act differs from the test applied by the Equal Employment Opportunity Commission under Title VII of the Civil Rights Act, the test applied by the National Labor Relations Board (NLRB) under the National Labor Relations Act (NLRA), and the test applied by the Internal Revenue Service under the Internal Revenue Code. Thus, a worker may be an independent contractor for federal tax purposes but an employee for benefits purposes. Because workers may be designated as independent contractors for some purposes but not others, contractors should seek competent legal counsel when determining independent contractor status in the states where they operate.
The primary business advantage of hiring independent contractors is that they are not subject to minimum wage or overtime requirements. An agreement between the business and the worker designating the worker as an independent contractor is not the last word, however. Courts and agencies examine the facts surrounding the working relationship, and if the worker was wrongly classified as an independent contractor, the business may be liable for unpaid wages, overtime, and other benefits awarded to workers classified as "employees."
Independent contractor providers of labor must comply with the NLRA. If a prime contractor enters into a collective bargaining agreement containing a restrictive subcontracting clause and signs a subcontract with a labor broker that falls under that collective bargaining agreement, the contractor will be bound by that clause. The more difficult situations arise with PEOs and temporary staffing agencies.
Until 2000, temporary employees provided by outside labor providers ("temp agencies") could be included in the same bargaining unit as the hiring employer's employees only if both the contractor and temp agency agreed. The NLRB reversed this rule and held that unions could include temporary and regular employees in one bargaining unit without the consent of both employers, however.
In all PEOs and most temp agency situations, the contractor and the labor provider are co-employers. Both have an employment relationship with the employees and have a duty to bargain with the union — but only concerning their particular responsibilities. For example, the primary employer may be required to bargain over terms such as wages, working conditions, discipline, and discharge, while the temp agency or PEO may be required to bargain over the benefits.
The converse is also true. A union could theoretically organize all PEO or temp agency employees without including the client's regular employees. This will not necessarily result in all the client companies employees becoming organized if they do not share interest sufficient to constitute an appropriate bargaining unit. Unions can choose how to organize a contractor in a co-employer relationship — either directly or through the staffing company.
This situation creates a number of potential problems for both the contractor and the PEO. It can complicate the collective bargaining process and under the joint employer doctrine, one joint employer may be liable for the unfair labor practices of another joint employer.
The Right to Collect Under a Lien or Bond
In some cases, labor brokers and PEOs may be able to collect unpaid funds from third parties by filing a mechanics' or construction lien or by making a bond claim. Courts will examine the parties' contractual agreements and working relationship. While the contractual allocation of responsibilities is important, the relationship often determines the outcome.
Generally speaking, the more a labor provider looks like "the employer," the greater the likelihood that the provider will collect under the lien or bond. The more it looks like just a payroll service, the less likely it is to collect.
Contractor Licensing, PEOs, And Labor Brokers
Most states and some local governments require contractors to be licensed. The licensing schemes and the statutes, ordinances, and regulations that implement them vary. An entity that fails to secure a required license risks not being able to sue to recover the value of its work or services. Licensing laws are often used to avoid payment. Consider the situation faced by a labor broker in a series of Oregon cases. The labor broker subcontracted "labor only" to contractors on public-and private-works projects by hiring a contractor's employees (taking responsibility for hiring, firing, payroll, tax reporting, processing union dues, etc.), and then subcontracting with the contractor to provide labor for a project. If the contractor failed or refused to pay, the broker exercised its lien or bond claim rights to be paid.
When arriving in Oregon, this labor broker contracted with capital-impaired subcontractors. In some cases, it required joint check agreements from the prime contractors. In other cases, it relied on its bond claim rights. When the subcontractors were unable to pay, the broker began collection efforts against the prime contractors and/or their bonds. In at least two situations, the prime contractors argued that the labor broker could not bring a collection action because it was not a licensed Oregon contractor. In one case, the trial court determined that the labor-only subcontractor's failure to register with the Oregon Construction Contractors Board foreclosed collection under the bond. A court probably would not have found that a PEO needed to be licensed. Other cases have reached different conclusions on similar facts.
A contractor contemplating a relationship with another company to procure labor should seek competent legal advice and secure a written agreement.
Here is a checklist of issues to consider when preparing such an agreement:
- Clearly state if an independent contractor or co-employer relationship is anticipated;
- Clearly establish each party's right to manage and supervise the workforce and specify which party has the right to hire, fire, and discipline;
- Consider post-employment rights under severance pay, profit sharing, stock purchase, COBRA, ERISA, and other benefit plans to avoid unanticipated payments;
- Consider collective bargaining issues, such as the impact on seniority of a transfer of "employer" status on seniority. Using a PEO or labor broker may require bargaining with the union if the contractor is organized;
- Specify which party will be responsible for compliance with the local, state, and federal laws governing the workplace. Regardless of the agreement, some laws may designate which party is responsible; and
- Consider the financial strength of the PEO or labor broker. The agreement should include indemnification provisions allocating liability according to the parties' expectations.
Leasing employees from labor brokers or entering a co-employer relationship with a PEO can be a valuable management tool for contractors. The pitfalls are many, however. Careful attention to detail is necessary to avoid unanticipated costs and liability.
This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations. For more information on this topic, please contact firstname.lastname@example.org or call (888) 598-7070.