Concerns with Labor Brokers

As small business creates jobs, it has to come to terms with the changing nature of employment. This is not your daddy’s workplace.

  • Work is no longer a career for most people.
  • Employees do not expect full-time employment at one worksite for an indefinite period.
  • Workers include more women, older people, and immigrants.

As an employee or small business owner, you can resist change or embrace it. But, you still have to deal with it. One option is the risk presented by Labor Brokers.

Labor brokers

Labor brokering has been a major source of contention in South Africa and the deep south of the US where it has been heavily used in laborious work. The Labor Broker hires laborers. They, then, assign or sub-contract their employees to an employer - creating a three-way employment relationship between broker, employer, and worker. This arrangement employs many farm workers, dry wall installers, and construction laborers.

  • Contractors can access additional ready labor, much of it skilled.
  • Outsourcing in this way reduces the employer’s employee benefits overhead.
  • Contractors readily fill short-term opportunities without the expense of recruiting, on-boarding, and payroll/tax administration.
  • Contractors hold onto a corps of proven employees and fill the temporary positions with the brokered employees hired and terminated with ease.

The Big However

This tri-party employment relationship benefits the employer but presents the risk of considerable liability.

  • Contracting owners incorrectly assume they have no obligations to the employees because the broker actually employs them.
  • The contractor and broker are joint employers, so the contractor owes these brokered employees many of the same duties they extend to their regular employees. For example, taxes, FICA, Workers’ Comp, and overtime are employer responsibilities, and the broker contract does not shelter the contractor from the liability for fulfilling these obligations.
  • An employer must perform a due diligence audit of any agreement to confirm the contract’s compliance with state law.
  • Federal and state laws have not kept up with evolving employment structures. Statues have had problems fully grasping the concept of joint employers. Contractors need counsel on avoiding designation as “employer” or “joint employer” to distance themselves from employee laws and regulations – and the consequent liability.

What Brokers Do

Labor Brokers recruit and hire workers and, then, deliver them to client companies for temporary placement. The arrangement allows the customer contractor to phone-in worker needs every day. The broker sends the desired workers to the site where they are needed. While they are on site, the employees work under the direct control of the customer contractor’s supervisors. In a sense, it is a structured way of processing and placing day workers.

The contractor can dismiss a worker or refuse to bring on a worker and does not pay the worker directly. Instead, the broker pays the worker and charges the contractor for the wage, expenses, taxes, FICA, Social Security, Medicare, and so on.

There is risk in trusting the broker to comply with statutes regulating employees and independent contractors. To define the difference, the courts consider:

  • Nature of the work and skill requirements
  • Time worked and how termination is handled
  • Payment method
  • Availability of annual leave
  • Value of the work to the employer’s business
  • Existence of retirement benefits
  • Intention of the parties involved

Control of the work may be the differentiating issue. Because the contractor controls the employee’s work, decisions lean toward the contractor as employer or joint employer.

8 Issues that may Cause you Concern

The contractor must:

  1. Fulfill employer-employee obligations, such as OSHA, FMLA, ADA, COBRA and Davis-Bacon.Must comply with Title VII, so they remain exposed to claims of sexual harassment and discrimination.
  2. Verify the employee’s right to work in the United States.
  3. Audit the broker’s payment of workers’ compensation insurance premium.
  4. Verify the labor broker’s compliance with FLSA regulations on hours worked and overtime.
  5. Count the brokered employees as well as permanent employees in compliance with count-based statues, including FMLA and COBRA.
  6. Confirm the broker’s regular payment of unemployment taxes.
  7. Write benefit plans carefully if they intend to exclude temporary workers from coverage.

In short, when there is ambiguity about the “employer of record,” the courts and regulators will side with the employee. Calling someone an independent contractor does not necessarily make it so.

Read more on the Four Categories of Employment.