Busy employers sometimes prefer using staffing agencies to avoid the hassles of recruitment, interviewing, hiring, wage payment, and benefits. However, convenience comes together with responsibilities. In some instances, especially for wage and hour claims, temp employees can sue the outsourcing employer (1) as directly liable for wages, or (2) as jointly liable for a staffing agency’s violations, or a combination of (1) and (2). Yet, the employer has an important remedy of (3) indemnification.
(1) Is the Outsourcing Employer Directly Liable to Temp Employees?
The question of direct liability depends on many factors. However, the common pattern is this – if the company had some level of control over the temp employees, there is a potential for direct liability on wage and hour claims. How to measure this level of control? Different laws have different measuring sticks. The California state laws rely on wage order definitions of "employer," and the federal FLSA has an "economic reality" test.
California State Law: IWC Wage Orders’ Definition
Under California state law, even if the staffing agency was the one who recruited, interviewed, hired, and paid the employee, the outsourcing employer can still be their direct “employer.” The California Supreme Court said that the definition of “employer” is “specifically intended to include both temporary employment agencies and employers who contract with such agencies to obtain employees within the definition of ‘employer’ […].” Martinez v. Combs, 49 Cal.4th 35, 59 (Cal. 2010)(emphasis is mine).
The definition of “employer” can be found in the Industrial Welfare Commission’s (“IWC”) wage orders. This definition includes three alternative options: (1) employer is the one who had control over wage and hour or working conditions, (2) who “suffered and permitted” the violation, or (3) who engaged the employees (similar to the common law concept of employing). SeeMartinez, 49 Cal.4th 35, 64. If a company satisfies any of the alternative definitions, it becomes an “employer” even if it did not directly hire the employee.
Federal FLSA: Economic Reality Rule
Under the federal Fair Labor Standards Act (FLSA), “employer” is defined a bit differently. The Ninth Circuit has adopted a four-part “economic reality” test to determine when the employer-employee relationship exists. These factors include whether the employer: “(1) had the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records.” Dawson v. Nat'l Collegiate Athletic Ass'n, 932 F.3d 905 (9th Cir. 2019) (citation omitted).
These factors are used as a guide, but the ultimate determination is based upon the circumstances of the whole case. So, even if some factors are not satisfied, but others are satisfied, a company may be held directly liable for wage and hour violations. (2) What If the Company Is Not a Direct “Employer”? Is It Still Liable for a Staffing Agency’s Violations?
Even if the company did not fall under any of the definitions of “employer,” California Labor Code §2810.3 states that the employer shares civil liability with the staffing agency for “payment of wages.” California courts call this a “joint liability.” Noe v. Superior Court (Levy Premium Foodservice Partnership), 237 Cal.App.4th 316, 333 (Cal. Ct. App. 2015) (“Thus, even if the business entity is not the wage claimant’s employer, and therefore owes no duty to pay wages under section 1194, the entity is nonetheless liable because section 2810.3 imposes joint liability.”).
There are some exceptions from this statutory joint liability: if the employer hires five or fewer temp employees at a given time, if it hires only exempt employees, if the employer hires temp employees not for work in its usual course of business, or if the employer is a political subdivision, and other industry-specific exemptions. §2810.3(a)(3)-(6) & (p).
Also, this statutory joint liability has a notice requirement. §2810.3 requires that prior to filing an action against the contract employer, the employee must notify the contract employer about the violations. §2810.3(d). At least one court treated this requirement as a prerequisite to the §2810.3 liability. The California Northern District Court dismissed the claim with prejudice because of the lack of such prerequisite notice. Jones v. Tracfone Wireless, Inc., No. 20-cv-04345-BLF (N.D. Cal. Feb. 4, 2021). (3) Will the Company Have to Pay for the Staffing Agency’s Shortfalls?
If the company is found liable – directly or jointly – it will have to pay the judgment. However, employers are not left without remedies. One of those is called indemnification. Labor Code §2810.3(g)&(h) explicitly allows employers and staffing agencies to include lawful remedies in staffing agreements, which includes indemnification.
For example, in Grande v. Eisenhower Medical Center, 44 Cal.App.5th 1147 (Cal. Ct. App. 2020), the staffing agency signed a staffing agreement, which stated that the agency had the “exclusive and total legal responsibility as the employer of [employees], … including … compliance with” all wage and hour laws. The staffing agreement also provided that the agency would indemnify the employer. After the temp employees obtained a settlement from the staffing agency, they turned around and sued the contracting employer. The employer then demanded indemnification from the staffing agency, and the agency tried to dismiss the case to no avail. So, particular attention should be paid to the language of indemnification provisions in staffing agreements.
Another important thing to remember is that indemnification rules cannot eliminate the risk of insolvency or bankruptcy of the staffing agency. Employees will always aim at the one with the deepest pockets. So, make sure that you choose the right staffing agency, just like you would select a person to be stuck in the same boat with on the open sea of California wage and hour compliance.