Over the years, I have fielded a dizzying array of questions regarding term limits and their effectiveness in addressing co-employment issues. Co-employment describes the relationship among two or more organizations that exert some level of control over the same worker or group of workers. Co-employers often share some degree of liability for the shared employees, which they are eager to mitigate, often by using term limits.

The Darden 13-Factor Co-Employment Test

In its Nationwide Insurance v. Darden decision, the US Supreme Court established 13 factors for determining employee status.

  1. The hiring party’s right to control the manner and means by which the product is accomplished;
  2. The skill required;
  3. The source of the instrumentalities and tools;
  4. The location of the work;
  5. The duration of the relationship between the parties;
  6. Whether the hiring party has the right to assign additional projects to the hired party;
  7. The extent of the hired party’s discretion over when and how long to work;
  8. The method of payment;
  9. The hired party’s role in hiring and paying assistants;
  10. Whether the work is part of the regular business of the hiring party;
  11. Whether the hiring party is in business;
  12. The provision of employee benefits; and
  13. The tax treatment of the hired party.
But the fact is, in the overwhelming majority of cases, instituting a term limit policy — or eliminating one — would do almost nothing to change the employment (or co-employment) status of the workers involved, and would not create, reduce or change risk in any way.

A Factor Among Many

There are a number of tests that apply to the relationship between a business and a contingent workforce. The applicable test varies based on the government agency involved, the relevant statute and the jurisdiction.

Duration of an engagement is a factor in many of those tests. But, in many staff augmentation situations, the worker is in the client’s building, doing the client’s work, under the client’s direction and control, in a client-set schedule and using the client’s equipment.

Based on these facts, government agencies often presume co-employment, and co-employment often exists immediately upon the beginning of the engagement. Adding a term limit will almost never change this outcome.

Darden and the courts. The most commonly cited co-employment test comes from the US Supreme Court case of Nationwide Insurance v. Darden, which set forth 13 factors for determining employee status (see sidebar).

One of the notable features of the Darden test is that it is not a “box-checking” test. Courts can do as they please — they are not required to consider all 13 factors, or attach certain weight (or any weight at all) to any particular factor — and courts are permitted to consider other factors not on the list. While some courts will state that there is no most-important factor, where courts do identify a key factor is always the first one: the right to control.

In the staffing firm/buyer context, there are almost always some factors that militate in favor of finding the staffing supplier to be an employer, some that militate in favor of the client as employer, some that militate for or against both, and some factors that are neutral.

  • Client as employer. In most staffing contexts, the key factors that usually weigh in favor of the client as employer are control, location, supplying tools, right to assign projects, and control over when/how long to work.
  • Staffing supplier as employer. Some factors that usually militate in favor of the staffing supplier as employer are tax treatment and payment of benefits.

There are almost always some factors that weigh for and against employee status for almost every worker.

The reason why term limits are usually irrelevant is that, from the outset, the staffing company and the client usually both have sufficient indicia of employer status to qualify as “employers.” When that is the case, term length is irrelevant to co-employment.

Legally relevant. This is not meant to dismiss duration as a factor. It is, in fact, legally relevant. However, if a business already has a co-employment relationship, a term limit will not change that.

After a diligent search, we could not find a single court decision in which a term limit was a dispositive factor in finding that co-employment did or did not exist. And while courts will often recite duration as a factor, there are few cases in which duration is even referred to as a significant factor, let alone a deciding factor.

EEOC. On co-employment of staffing firms’ assigned workers, the Equal Employment Opportunity Commission’s position is the workers “typically qualify as ‘employees’ of the staffing firm, the client to whom they are assigned, or both.” Further, “[t]he staffing firm and/or its client will qualify as the worker’s employer(s) if … one or both businesses have the right to exercise control over the worker’s employment.”

The most important consideration in the co-employment analysis is “the right to control the means and manner of his/her work performance rests with the firm and/or its client rather than with the worker herself.” The EEOC goes on to state the entire working relationship must be assessed.

DOL. The Department of Labor’ Wage and Hour Division issued a new Final Rule in January for evaluating whether joint employment exists under the Fair Labor Standards Act. The Final Rule clarifies that when an employee has an employer who suffers, permits, or otherwise employs an employee to work, and another person simultaneously benefits from that work, the person simultaneously benefiting from the work is a joint employer “only if that person is acting directly or indirectly in the interest of the employer in relation to the employee.”

The Final Rule adopts a four-factor balancing test to determine whether an individual or entity qualifies as a joint employer in this situation. Specifically:

  1. Does the potential joint employer hire or fire the employee? 2. Does the potential joint employer supervise or control the employee’s work schedule or conditions of employment to a substantial degree?
  2. Does the potential joint employer determine the employee’s rate and method of payment?
  3. Does the potential joint employer maintain the employee’s employment records?

No single factor is dispositive in determining joint-employer status. However, a person must exercise actual control, not reserve optional control, to establish joint employment to meet the FLSA joint-employer standard.

Other Applications

Term limits can be valuable when used correctly. For example, they are extremely useful in forcing a retention decision at a particular point in time. This can ensure that a contingent worker remains because of a conscious decision and not due to inertia. In some cases, however, the costs outweigh the benefits.

A term limit on contingent workers’ assignments typically results in increased recruiting and training costs. This is due to losing a worker who is already trained and needing to get the replacement up to speed. Further, there is a chance the replacement worker is less skilled and less productive than the person they replaced. As a result, frequent turnover may reduce a company’s efficiency and competitiveness in its respective market.

Term limits are not irrelevant to the discussion. However, they normally will not change a company’s co-employer status. Often, co-employment is unavoidable in contingent workforce contexts. Before imposing term limits, staffing firms and their clients must understand the laws applicable to their contingent workforces and review the totality of the working relationship.

Staffing agencies and their clients should not rely on term limits as an affirmative defense to co-employment, unless there is an objective reason to believe co-employment likely does not exist otherwise. Rather, staffing agencies and their clients should carefully scrutinize their use of term limits and determine whether they add value to their relationship.