At the dawn of the staffing industry, staffing firms had few legal issues to worry about, but employment law has grown so much it is now a significant burden on every staffing firm. However, handling employment law issues for clients contributes greatly to the value staffing firms deliver. Here is a round-up of some current and emerging issues.

The Classics

All of the classic employment law hazards for staffing firms are still in full play, and their enforcement has been ramped up by the federal government, by some states and by plaintiff’s lawyers.
These hazards include:

  • Wage and hour issues of overtime, off-theclock time, preliminary/postliminary activity, exemptions
  • Disability issues as affected by the Pregnancy Discrimination Act, workers’ compensation, mandated sick leave, the Family and Medical Leave Act, the Americans with Disabilities Act, insurance, employer policies and drug testing laws
  • Discrimination by the traditional protected categories, plus new ones like gender orientation, genetic history, criminal background
  • Independent contractor misclassification, now aggravated by Affordable Care Act risks
  • Workplace safety in the era of the Occupational Safety and Health Administration’s targeting of temporary staffing
  • Retaliation claims associated with all of the above

Customer Demands Under ACA

The Affordable Care Act is difficult and costly, but customers are now making it an even greater problem for staffing firms.

Casual language in the final IRS employer mandate regulations suggests the IRS may reclassify assigned employees as the common law employees of your clients instead of your staffing firm. Benefit and legal counselors are advising them to demand their staffing suppliers to offer affordable minimum value coverage to every worker assigned to them, bill more for insured employees than for non-insured employees, tell customers which employees are insured, and indemnify customers for all ACA penalties.

Some of these demands have a reasonable basis, but the way they are turned into contractual obligations is excessive, legally risky and extremely disadvantageous to staffing firms. Giving in to these demands unnecessarily pushes staffing firms way beyond ACA compliance and raises other issues, like customer discrimination against insured employees and catastrophic indemnity exposure. ACA contract amendments should be negotiated very carefully.

Employer Status and Payrolling

The aforementioned ACA regulation that threatens to deem assigned employees the common law employees of staffing customers may lead to other challenges to the central premise of the staffing business, which distinguishes the general, common law employer role of staffing firms from the special employer role of customers. “Payrolling” arrangements are especially vulnerable to this idea.

Payrolled employees — those sourced by the customer — are usually labelled as payrollers. They often command a lower margin than employees sourced by the staffing firm, are exempted from conversion fees, are excluded from the staffing firm’s minimal benefit plans as well as the staffing firm’s indemnity exposure. These differences highlight the staffing firm’s weak employer role with payrolled employees and invites their reclassification by the government, as well as lawsuits and other claims by payrollers against customers.

Staffing firms can minimize this risk by blending payrollers with the other assigned employees, under the same terms of employment. The cost savings customers expect for sourcing the employees can still be achieved by tracking the number of payrollers handled over time and baking a credit into the overall negotiated rates.

The Sleeping Dog of PEO Law

The employer status of PEOs has been under recurring governmental challenge for many years, while staffing firms have rarely been challenged this way. Historically, PEOs have embraced government regulation, while staffing firms have generally resisted it, so it was logical for PEOs to seek legislation to clear up the employer status issue.

For more than 15 years, the National Association of Professional Employer Organizations (NAPEO) lobbied for a federal law to solve their problem. The American staffing Association initially supported this proposal but withdrew that support in 1999. At the end of 2014, NAPEO’s proposal was finally enacted and signed into law as the Small Business Efficiency Act.

The law creates a new type of “certified professional employer organization,” which the IRS will officially continue to recognize as the employer for payroll taxes. However, there are application, bonding, auditing, contracting, liability and other burdens and requirements to qualify for this certification. The certification is currently voluntary, but the marketplace reality is it will become practically mandatory. It would be a single, easy step to make it legally mandatory as well.

Most state PEO laws contain some kind of exclusion for “temporary help,” defined in a way that covers only some of the things that staffing firms do. The new federal law does not define the term PEO, and there is no exclusion of “temporary help” situations. Still, many of the requirements to be a certifi ed PEO appear in many if not most staffing firms’ customer relationships. So this federal law could apply to many staffing firms right now. Weaknesses in state law definitions of PEO also make possible a new wave of state enforcement of licensing and registration requirements.

Why could this become important to contract staffing firms? This certification process may be the “camel’s nose under the tent” for regulation of the entire staffing industry. The ACA regulations reveal the IRS believes many staffing firms perform PEOlike services, and it wants to treat those staffing firms and PEOs as not being the common law employers of the assigned employees. This is not a change for PEOs, which already consider worksite employees to be the common law employees of the customers, but it could create new and serious issues for contract staffing firms on many fronts.

Strategy After King v. Burwell

The United States Supreme Court is expected to have decided by now whether the individual subsidy and employer penalty provisions of ACA will continue to apply in the two-thirds of the states that have not established their own health insurance exchanges. (As of this writing, the decision was still pending.)

If the government wins the case, nothing will change. If the citizen-challengers win, the core holding is likely to be that, while a state refrains from establishing an exchange, residents of that state will not receive government health insurance subsidies and full-time employees residing in that state will not generate the so-called “B” penalties for their employers when those employers do not offer them affordable, minimum value coverage.

The “A” penalty for employers who fail to offer coverage to most of their employees is triggered by the grant of a subsidy to even one employee, regardless of where that employee resides, and the penalty is $2,081 times all of the employer’s full-time employees. Single-state staffing firms in non-federal exchange states would be relieved of the “A” penalty, but multi-state firms may remain vulnerable to it. Multi-state staffing firms may still be able to escape the “A” penalty in most states by compartmentalizing their payrolls into separate EIN entities for the federal and non-federal states.

Self-insurance Discrimination

ACA bans discrimination in favor of highly compensated employees in insured health plans. The ban was scheduled to begin in 2011, but IRS waived enforcement until regulations are issued. As of this writing, no regulations have been proposed.

Self-insured health plans, however, have been subject to anti-discrimination tax law and regulations for more than 30 years, under Internal Revenue Code §105(h). Most health plans that staffing firms are adopting under the ACA involve self-insurance, yet there has been very little public discussion of their compliance with the antidiscrimination rules. IRS has exercised virtually zero enforcement of these rules. However, ACA includes greater scrutiny of self-insured plans, and the plans’ potential for avoiding some of ACA’s minimum coverage standards may resurrect government interest in self-insurance in surprising and expensive ways. Self-insured firms should test their plans against these rules.