Why Leased Employees Don’t Alleviate Liability

January 3, 2016Articles Law360

In a common scenario, a business obtains some or all of its workers from a third-party staffing firm or similar provider, which remains the individuals’ “employer of record” for payroll and other purposes. There are any number of sensible business reasons to utilize such an arrangement, but a common misconception is that the individuals involved are and remain employees only of the staffing firm and that the “customer” is therefore insulated from any potential liability involving them. On Nov. 18, 2015, the U.S. Court of Appeals for the Third Circuit provided a clear reminder that this assumption of insulation is at best dangerous and at worst entirely mistaken.

In Faush v. Tuesday Morning Inc.,__ F.3d ___, (3d Cir. Nov 18, 2015), the Third Circuit held, in its first precedential opinion on the issue, that companies contracting with staffing companies for temporary workers may be held liable for such temporary employees’ discrimination claims under Title VII and comparable state statutes. While the court’s opinion largely follows the analysis of existing decisions of other circuits and the interpretive guidance of the Equal Employment Opportunity Commission, it represents the first clear statement of the law of the Third Circuit on the issue and provides valuable guidance to employers and attorneys in this circuit.

The Facts and Holding of Faush

The relevant facts of Faush are straightforward. Matthew Faush was employed by Labor Ready, a staffing firm that provided temporary employees to its clients.[1] Id. at *3. The staffing agency placed Faush on a temporary assignment at closeout home-goods retailer Tuesday Morning Inc. Id. Faush was only assigned to the store for 10 days, where each day he worked for approximately eight hours with nine other temporary employees. Id. The temporary employees were asked to unload merchandise, set up display shelves, and stock merchandise on the shelves in preparation for the store’s opening the following month. Id. at *1. During the course of Faush’s relatively short tenure at Tuesday Morning, he made several internal complaints of racial discrimination and, according to his complaint, he and his African-American coworkers were ultimately terminated. Id. The complaint provided no further explanation of the circumstances of the “termination” — as, for example, the respective roles of Labor Ready and Tuesday Morning — nor do the Third Circuit or District Court opinions provide any insight into those questions.

Following the termination alleged in the complaint, Faush sued Tuesday Morning for race discrimination under Title VII, the Pennsylvania Human Relations Act and 42 U.S.C. § 1981. The parties conducted limited discovery on the threshold issue of whether Tuesday Morning could be considered Faush’s employer. After such discovery proceeded, the trial court entered summary judgment for Tuesday Morning, finding as a matter of law that it had not been his legal employer under the test articulated by the Supreme Court in Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992). In doing so, the trial court focused on what it characterized as the “key three” of the Darden factors, which entity:

1. Paid the employees’ salaries,

2. Hired and fired them, and

3. Had control over their daily employment activities.

However, on appeal, the Third Circuit reversed. The Third Circuit held that the entry of summary judgment was improper because there were a number of aspects of the relationship between Faush and Tuesday Morning that were “more than sufficient” to permit a jury to conclude that Tuesday Morning and Labor Ready were his joint employers and both amenable to suit under Title VII and the other statutes. Faush, at *6.

Key Factual Issues Relevant to the Third Circuit’s Holding

The Third Circuit pointed to a number of incidents of an employment relationship that are not at all uncommon in an “employee leasing” situation. For example:

  • While Labor Ready set the leased employees’ wage rate and was responsible for payroll taxes and other matters, Tuesday Morning retained primary responsibility for compliance with applicable prevailing wage laws and was in a better position than Labor Ready to do so and explicitly undertook to comply with all state and federal laws governing employees.
  • While Tuesday Morning did not pay the leased employees directly, its payments to Labor Ready were “functionally indistinguishable” from direct wage payments because they simply reimbursed Labor Ready for its direct hourly labor costs for each hour worked by the leased employees and added an administrative fee.
  • While Tuesday Morning did not have the power to hire or fire an individual as an employee of Labor Ready, it retained complete control over whether a Labor Ready employee could or could not work in its facility.
  • Once the leased employee reported for work, the work was performed entirely on Tuesday Morning’s premises, rather than at some remote site controlled by Labor Ready, and Tuesday Morning provided training, equipment, materials and supervision, and otherwise exercised complete control over what the leased employee did and where, how, and for how long they did it. Conversely, there was almost never any Labor Ready supervision on the premises.
  • The leased employees were not provided on a temporary basis for a specific project, but rather worked on an ongoing basis in a manner indistinguishable from Tuesday Morning’s “own” employees.
After reviewing these factors in context, the Third Circuit held that “a reasonable jury could find that Tuesday Morning was Faush’s joint employer and that summary judgment was therefore improper.” Id. at *9 While it bears emphasis that the Third Circuit did not find that these factors created an employment relationship between Faush and Tuesday Morning as a matter of law, but only that they created a fact issue for the jury, the attendant risks for employers are plainly apparent.

Recommendations for Employer Compliance

Faush serves as a timely reminder of the principle that “if it seems too good to be true, it probably is” and that the assumption that a business can insulate itself from employment practices liability simply by making use of leased employees is just as simply incorrect. On the other hand, Faush also provides important guidance to staffing firms and their customers alike on how best to structure and conduct their relationship so as to serve their business goals while minimizing unwanted potential liability.

On the heels of Faush, it is clear that companies need to understand their relationship with their temporary service providers and the joint employment responsibilities that may arise out of that relationship. Companies using temporary staffing should seek the assistance of counsel for more direct advice regarding managing the joint employment exposure.

[1] The difference between temporary and leased employees was not addressed by the Court.

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