|StaffingSmarts.net > Intelligence Report > Assignment Limits and Concerns About Benefits Liability
Assignment Limits and Concerns About Benefits Liability
|By Edward A. Lenz, Esq., General Counsel
American Staffing Association
|You also may download a copy of this StaffingSmarts Intelligence Report (PDF 318 KB).
professionals at organizations that use staffing services have concerns about
benefits liability, stemming largely from litigation during the 1990s involving Microsoft Corp. (Vizcaino
v. Microsoft). In the late 1980s, Microsoft used independent contractors
to do the same kind of work done by its direct employees. After the Internal
Revenue Service ordered the contractors to be reclassified as employees,
Microsoft hired many of them directly or engaged them through staffing
contractors later sued Microsoft, claiming to be common-law employeesof Microsoft and entitled to the company’s benefits—retroactively. After
years of litigation, the court concluded that the former contractors were
common-law employees of Microsoft and entitled to the company’s stock purchase
benefits. Microsoft settled the case in 2000 for $97 million.
In the wake of the
Microsoft litigation, some companies adopted policies that limited the length
of assignments for temporary and contract employees from staffing firms.
Companies saw this as a way to protect themselves from the kind of
“retro-benefits” claims faced by Microsoft. Some of these policies appear to be
based on the erroneous belief that, after working for a certain period of time,
temporary or contract employees are automatically eligible for coverage under a
client company’s benefit plan, or even entitled to be hired for a regular
full-time position with the company.
assignment limits can cause economic harm to temporary or contract employees whose assignments are terminated prematurely, and can disrupt a
company’s business operations, HR professionals should look closely at their
organization’s staffing policies to ensure that such limits are truly necessary
and not based on misinformation. To help dispel some of the common legal
misperceptions, this paper discusses the basic principles of law that apply to
employee benefit plans, then decribes steps client companies can take to avoid
law regulating employee benefits is the federal Employee Retirement Income
Security Act, which sets rules for the structure and administration of employer retirement and other benefit plans. It does not, however, require
to offer benefits or dictate what level of benefits must be provided.
benefit plans are generally regulated by Erisa, federal tax law also comes into play. While the tax rules do not require employers to offer benefits, they
encourage employers to do so by allowing certain benefit costs under a
“tax-qualified” plan to be deducted by employers and to be excluded from income
Some of these
tax advantages are conditioned upon the plan satisfying certain coverage and
nondiscrimination rules. For example, retirement plans, including pension,
profit-sharing, and 401(k) plans, cannot discriminate in favor of highly paid
employees either in their coverage or their level of benefits. So-called
“welfare” plans, such as life and health insurance, generally either are not
subject to such rules, or are subject to somewhat more liberal coverage and
generally do not have to cover all employees to have a tax-qualified plan. For
example, under a pension, profit-sharing, or 401(k) plan, a company generally
can exclude up to 30% of its rank-and-file employees without endangering the
plan’s tax-advantaged status. As explained later, this “slack” is why companies
can usually exclude staffing firm employees from their benefit plans without
jeopardizing the tax status of those plans.1
Common Misconceptions Regarding Erisa and Tax Code ‘Hours’ Rules
relying on the Erisa “year of service” rule, terminate staffing firm employees
before they reach 1,000 hours in the belief that all individuals who work at
least 1,000 hours in a year are entitled to participate in a company’s
retirement plan.But the rule does not apply to staffing firm employees or to employees who have
been expressly excluded from the plan under a proper exclusion provision. As
discussed later, companies can take steps to avoid having staffing firm
employees classified as their employees and can lawfully exclude them from
their benefit plans regardless of their length of assignment.2
assignment-limit policies are based on the federal tax code provisions dealing
with “leased employees”—Internal Revenue Service code section 414(n).
Leased employees are individuals who are not common-law employees of a company
but who have worked under the company’s direction on a substantially full-time
basis (generally 1,500 hours) for at least one year.
414(n) rules do not require companies to provide benefits to leased
employees—in fact, leased employees can and should be excluded from a
company’s benefit plan. The rules only require that leased employees be
included in the company’s head count for discrimination testing. This is not a
problem unless the company has so many leased employees (and other excluded employees) that they exceed the
“slack” in the company’s plan, which could affect the plan’s tax qualification.
Staffing firms can help manage this for their clients by keeping track of the
number of leased employees to ensure that the slack is not exceeded.
also protect against retro-benefits liability in a number of ways discussed
later. Companies and their staffing firms should always consult with legal
counsel on how best to implement these strategies, especially those involving
plan amendments and employee waivers.
|Plans Should Expressly Exclude Staffing Firm Employees
important step companies can take to protect themselves is to amend their benefit plans to clearly exclude staffing firm employees. The courts and
the IRS expressly allow this. Further information is available in the IRS
Technical Advice Memorandum, which is posted on the ASA Web site, americanstaffing.net (in the left navigation bar, click on Legal & Government Affairs, then Issue
Keeping in mind
that any plan language should be discussed with legal counsel, the following
template language is suggested for the purpose of excluding staffing firm
employees from participation in a company’s Erisa plan:
includes any employee of [Company] who is paid in U.S. currency, but shall not
individual whose services are used by [Company] pursuant to an employment
agreement or personal services agreement if such agreement provides
that such individual shall not be eligible to participate in [Company]
who are not paid directly by [Company] or an affiliate of
who are not on [Company’s] payroll.
who are “leased employees” within the meaning of 414(n) or (o) of
the Internal Revenue Code.
whom [Company] does not treat as its employees for federal income tax
withholding or employment tax purposes.
In addition to
amending their benefits plans to expressly exclude staffing firm employees,
companies may be able to achieve additional protection through agreements in
which the staffing firm’s employees expressly waive their right to the
company’s benefits. Court decisions generally support such agreements, but the
agreements must be written carefully. Some benefits experts believe such
agreements are not enforceable unless they are consistent with, and expressly
sanctioned by, the company’s benefit plan, which suggests that the agreements
must be tailored to each company’s situation. This should be discussed with
benefit plans to exclude staffing firm employees and executing employee waivers
are important steps companies should take to protect themselves against
retro-benefits liability. But there is another step they should take. Because
only employees may be considered eligible for benefits, companies should
minimize their contacts with staffing firm employees to avoid having them
classified as the company’s employees in the first place.
staffing firms should take responsibility for
- Recruiting, screening, testing, training, and interviewing the employees
- Determining the employees' wages, benefits, and expense reimbursement
- Hiring, firing, assigning, and reassigning the employees
- Handling the employees’ complaints and discipline
- Distributing the employees’ paychecks
Other steps that can be taken include
- Requiring distinctive badges for employees supplied by staffing firms
- Making separate reference to the staffing firm employees in company communications
- Channeling any social invitations through the staffing firm
- Making appropriate distinctions between staffing firm employees and
regular employees in business cards, letterheads, etc.
- Maintaining a staffing firm presence at the work site
assignment is not the sole issue in determining the employment status of
employees supplied by staffing firms. For tax and benefits purposes, it is one
of many factors under the common-law control test. Assignment limits may even
carry some risk if the company has not clearly excluded staffing firm employees
from its plan, as previously discussed, because they might be construed as an
effort to deny benefits by preventing staffing firm employees from reaching the
hours needed for plan participation. Companies could face charges of violating
Erisa, which protects employees from such employer action.
An example of
how companies can avoid common-law employer status by minimizing their contacts
with staffing firm employees can be found in an unpublished opinion by a
California federal district court in the same jurisdiction that decided the Microsoft case, Burrey v.
Pacific Gas and Electric Co. The Burrey case involved former employees of PG&E who were transferred to staffing
firms and continued to work at PG&E for 10 years. Despite the length of the
employees' assignments, the court found insufficient evidence to establish
common-law employment and ruled that the workers were not entitled to
PG&E's benefits. A copy of the opinion is available from ASA.
HR professionals are encouraged to review their companies' assignment-limit policies to determine whether they are too restrictive or even unnecessary. In any case, companies should amend their benefit plans to exclude staffing firm employees and minimize their contacts with them as outlined in this paper. Taking these steps will reduce companies' exposure to retro-benefits liability.
||Certain stock purchase plans, such as those involved in the Microsoft case, don't allow such slack because the tax rules applicable to those plans require virtually all employees to be covered. As a result, many employers that provide stock option benefits use nonqualified plans or "incentive stock options," which are not subject to the coverage rules.
||It's also worth noting that a 1,000-hour limit won't protect companies from liability under benefit plans such as health insurance that typically provide coverage within much shorter time frames.
||Companies will need
to be careful in how this exclusion is framed. Exclusions may run afoul of the
IRS and Erisa minimum service requirements if they are viewed as
"service-related" (e.g., exclusions for "part-time," "seasonal," or "temporary"
employees) as opposed to exclusions that are job-related (e.g., exclusions for
substitute workers or workers who are not on the employer's payroll). (See Feb.
14, 2006, IRS Quality Assurance Bulletin, posted on the ASA Web site, americanstaffing.net.
In the left navigation bar, click on Legal & Government Affairs, then Issue
Papers. The bulletin is posted under the heading "Assignment Limits and Client
Concerns About Benefits Liability: Issues and Answers.")