Employee Leasing in Arizona
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Leased employee agreements allow a business to contract for the services of an employee of another business. Any employer has legal responsibilities regarding its employees such as withholding and depositing income tax, making contributions to Medicare and Social Security, and providing worker's compensation insurance, among other things. One who leases an employee from another business does not inherit all of the legal responsibilities of an employer but may have specified responsibilities and privileges under a contract between the businesses.
Employment responsibilities are typically shared between the leasing company and the business owner. The business owner retains essential management control over the work performed by the employees. The leasing company, meanwhile, assumes responsibility for work such as reporting wages and employment taxes. The main responsibility of the business owner is writing a check to the leasing company to cover the payroll, taxes, benefits and administrative fees.
Temporary or leased employees made up four percent of the Arizona workforce in 1997. For lawyers and law firms, temporary or leased employees (including temporary lawyers) may fulfill a variety of important functions. The term "temporary" or "leased employee" has been applied to a number of employer/employee relationships including temporary employees, leased employees, loaned employees, part-time employees, seasonal employees, independent contractors, self-employed workers and casual employees.
The primary concern for customer employers is liability. There are several state and federal statutes, as well as common law theories, that can create liability if an employer/employee relationship is formed. The key question in determining liability is whether the customer or the supplier is the "employer" of the temporary employee. Although the law is unsettled on this issue, courts generally apply common law tests to determine whether the supplier employer, customer employer or both are "employers" under the various employment laws. These tests are generally the same tests used to determine independent contractor status and the focal point of these tests is control. The trend, it appears, is to find that the customer employer and the supplier employer are joint employers.
The customer and supplier both may be considered employers under the Arizona Workers’ Compensation Act. The Arizona Court of Appeals has held that the exclusive remedy provision of the Act barred a temporary employee from suing a customer employer. Arizona courts also have held that the customer employer can be exclusively responsible for maintaining workers’ compensation coverage for temporary employees.
Under the Fair Labor Standards Act (FLSA), the Department of Labor often seeks to find both the supplier employer and the customer employer jointly liable for complying with the FLSA’s minimum wage, overtime, equal pay, child labor and recordkeeping requirements. This is because the FLSA broadly defines "employer" as "any person acting directly or indirectly in the interest of an employer in relation to an employee."
Under the National Labor Relations Act, the trend also has been to find joint employer status between the customer and supplier employers. There are, however, exceptions in cases where the customer employer does not provide daily supervision of temporary employees. The National Labor Relations Board also takes the position that truly temporary employees, or employees of a joint employer, should not normally be included in the same bargaining unit as the customer’s "permanent" employees, or employees of a single employer.
Customer employers often believe that because they do not hire, fire, or directly pay temporary employees, they have no equal employment opportunity obligations toward those workers. However, new guidelines issued by the EEOC make it clear that both the supplier and customer employers may be liable for discrimination as to temporary employees. Thus, both the supplier and the customer employer should comply with federal anti-discrimination statutes, such as Title VII of the 1964 Civil Rights Act, the Americans with Disabilities Act, and the Age Discrimination in Employment Act.
Arizona courts also have held customer employers liable for discrimination under the Arizona Civil Rights Act. Supplier employers also should remember they have an extra obligation to ensure that they do not supply employees to customers that routinely engage in discrimination against temporary employees.
The Internal Revenue Code (IRC) defines "employer" as the "person for whom an individual performs or performed any service" unless that person does not have control of the payment of wages, in which case the "person having control of the payment of...wages" is the "employer." Using this definition, the IRS has taken the position that both the supplier employer and the customer employer may be considered the "employer" for payroll tax purposes. Recent decisions indicate that if the supplier employer defaults on its payroll tax or withholding obligations, the customer employer may be liable for those obligations concerning its temporary workforce. This is true even if the customer employer has remitted the taxes to the supplier employer for payment to the IRS.
The Federal Insurance Contributors Act (FICA) and Federal Unemployment Tax Act (FUTA) define employee as "any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee..." Thus, both the customer and the supplier employer could be liable for FICA and FUTA taxes if they exercise sufficient control over the temporary employee.
Although no employer is legally required to provide benefit plans to its employees, the Employer Retirement Income Security Act of 1974 (ERISA) governs employee benefit plans if they exist. A recent case from the 9th Circuit demonstrates why plan administrators should be careful about denying ERISA benefits to temporary employees. If a qualified benefit plan provides benefits to all "employees," temporary employees could be eligible to participate in the plan if their relationship with the customer employer satisfies the common law test for an employer-employee relationship. This is true even if the agreement between the employee and employer provides that no employer-employee relationship is intended or created.
The Immigration Reform and Control Act places the burden of verifying an employee’s eligibility for employment upon the supplier employer. Thus, customer employers generally do not have an obligation to verify the employment status of their temporary employees unless the customer employer knows the employee is not eligible to be employed in the United States.
In short, for purposes of workers’ compensation, wage and hour, union organizing, anti-discrimination, and tax laws, there are instances where both the supplier and the customer employer will be jointly liable for employment obligations. However, for immigration purposes, the supplier employer likely will not have any liability.
