Top Ten Tips Disclaimer
Temporary Employees
Employee Leasing
Payrolling
Best Practices for Temporary Staffing and Staff Leasing Firms
Co-employment or joint employment; "single employer"
Independent contractors
Temporary employees Top of Page
Temporary employees hired directly by a company are the company's employees for all intents and purposes and can file unemployment claims when the job runs out.
Alternative: hire temporary employees through a temporary help service.
In such a case, the temporary service is the employer and will deal with any unemployment claims from such employees.
Hourly labor cost is higher, but at least there will be no unemployment claims to worry about.
Temporary employees can be considered employees of both the client company and the staffing firm for purposes of wage and hour statutes and other laws under joint employment rules - cover this issue in any staffing agreement that you sign.
"1000-hour rule" – this is a requirement under the federal pension and benefits protection law known as ERISA – it requires that if an employee works at least 1000 hours in a 12-month period, and if the company has some kind of pension or retirement benefit plan, the company must give that employee the chance to participate in the plan – that rule does not apply to other types of benefits, though (see ERISA section).
Employee leasing Top of Page
In Texas, staff leasing companies are considered the "employers" of workers assigned to various clients, as long as the staff leasing firms are properly licensed and certified under applicable statutes (Chapter 91 of the Texas Labor Code).
Under Section 91.032(a)(2) of the Labor Code, a staff leasing firm is liable for unpaid wages, even if it has not been paid by the client company, but it is liable for other types of compensation that the client company may have promised to pay the employees only if it has contracted to assume such liability (see Section 91.032(c)).
In an unemployment claim situation, a former employee of a staff leasing company is subject to potential disqualification for voluntarily leaving work if he or she was subject to a policy requiring the employee to contact the staff leasing firm after a work separation, but such a disqualification requires the staff leasing firm to prove that the employee was given written notice of such a requirement at the time of the work separation by either the client company or the staff leasing firm (see Section 207.045(i) of the Texas Labor Code).
"Payrolling" Top of Page
With payrolling, a client company sometimes attempts to escape the obligations of an employer by assigning its employees to an outside entity known as a payrolling company for payroll purposes only – the payrolling company, though, does not act as an employer in any other way.
Texas considers such workers to be employed by the clients, not by the payrolling entity.
This is also the rule with "common paymaster" situations, in which separate, related companies establish an entity solely for the purpose of handling personnel and payroll matters for the members of that group, or else allow one of the members of the group to handle payroll matters for the rest of the group's members, either for an administrative fee or as a matter of convenience. The definition of "employing unit" is key to understanding the concept of payrolling; it is defined in Section 201.011(11) of the Act as "a person who ... has employed an individual to perform services for the person in this state." A "person" would be an individual, a partnership, or a corporation. Section 201.046 of the Act provides that the employer is the employing unit that receives the benefit of the work performed, regardless of whether the employees are hired and paid by the employing unit or its agent. In a payrolling situation involving a common paymaster, each separate employing unit receives the benefit of the services provided by the employees working at each location. Employing units with separate identities, i.e., separate corporate charters and the like, are separate business entities and thus separate employing units. TWC's position in this area of the law is explained in Tax Letter No. 7-80, as well as in Rule 13 decisions, including TD-98-066-0998 (January 5, 1999), TD-05-053-0505 (September 29, 2005), TD-08-024-0108 (August 26, 2008), and TD-09-013-0109 (May 27, 2009), holding that "payrolling companies" are not single employing units for the purposes of reporting wages and paying state UI tax, regardless of Section 3306(p) of the Federal Unemployment Tax Act (26 U.S.C. § 3306(p)), which would allow a common paymaster to be treated as a single employer under federal law under certain conditions.
For online tips from the IRS on how to use third-party payroll service providers, see http://www.irs.gov/businesses/small/article/0,,id=176943,00.html.
Best Practices for Temporary Staffing and Staff Leasing Firms Top of Page
To minimize risk that TWC will conclude that a staffing relationship is merely payrolling, the temporary staffing or staff leasing firm needs to act like the real employer:
Reserve the right in the client service agreement to exercise as many of the prerogatives of an employer, at least on paper, as possible, i.e., hiring, firing, reassignment, training, pay, benefits, and so on.
Have employees fill out employment applications.
Run all new temps/leased employees through the I-9 process.
Do at least minimal background/reference checks.
Get W-4s filled out.
Give workers' comp coverage notices (Notice 5 for non-coverage, Notice 6 for coverage).
Give them company policy handbooks.
Have them sign clear acknowledgement of receipt forms listing the staffing firm as the employer.
Any benefits should be given in the staffing firm's name.
Pay stubs should identify the staffing firm as the employer.
Do not let client firms include assigned employees in the client firm's internal employee e-mail distribution groups, employee rosters, or mailing lists
Give all statutorily-required notices for UI purposes (Section 207.045(h) for temporary help firms and 207.045(i) for staff leasing firms).
Report wages and pay UI and other payroll taxes to TWC and IRS.
Upon commencement of health plan coverage, termination of the employment relationship, and other qualifying events, give COBRA notices (PDF) to the ex-employee and affected beneficiaries when applicable.
Give reminders of who the employer is throughout the employment relationship and at the conclusion of the assignment, along with clear written instructions on how to recontact the employer for reassignment.
Co-employment or joint employment; "single employer" Top of Page
Especially in the case of temporary help and staff leasing firms, but also with other companies, the possibility of joint employment exists – if two independent entities jointly exercise enough of the attributes of an employer with respect to certain workers, it may be possible that the two entities will be considered "joint employers" of those workers for purposes of various employment laws.
A similar concept is that of the "single employer", which occurs when two nominally separate companies are so closely interrelated that they form a single employing unit for purposes of various employment laws. From a 1965 Supreme Court case called Radio Union v. Broadcast Service (380 U.S. 255, 257), the four criteria for determining whether two companies are really a single employer for employment law purposes are: (1) interrelation of operations; (2) centralized control of labor relations; (3) common management; and (4) common ownership or financial control. According to the Fifth Circuit Court of Appeals (the federal appeals court responsible for interpretation of federal law for Texas, Louisiana, and Mississippi), the most important criterion is the second one, i.e., centralized control of labor relations (see Schweitzer v. Advanced Telemarketing Corp., 104 F.3d 761, 764 (5th Cir.1997)). If one person or department does essentially all of the hiring, personnel administration, payroll, and firing for both companies, then there is a high probability that a court or agency will find that a single employer situation exists.
Independent contractors Top of Page
Independent contractors are self-employed – they are independent business entities in a position to make a profit or loss based upon how they manage their own independent enterprise – an employer of such an individual is merely one of the clients of that contractor.
Most states and IRS use similar tests to determine whether given workers are employees or independent contractors.
Whether the test applied is the common-law direction and control test, the ABC test, the economic realities test, or the IRS eleven-factor test, the issues are basically the same – all the tests boil down to whether the employer exercises direction and control over the performance of the services of the worker.
All the laws presume that a worker performing services for pay is an employee – if an employer thinks otherwise, it has the burden of proof in almost any possible legal situation.
Keep these characteristics of independent contractor arrangements in mind:
TWC tax examiners look for certain "red flags":
In an audit situation, an employer should try to show:
Return to Businesses & Employers
Return to TWC Home