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Legal Issues for Staffing Agencies

Because a staffing agency acts as the intermediary between employers and temporary employees, legal issues can arise that don't affect other types of businesses. As the owner of such an agency, you are required to know and understand the laws of several different governing agencies in numerous career fields. The employment laws discussed below can be particularly challenging for your staff to understand. You must ensure that both you and your staff follow local, state and federal laws when hiring an employee and placing him or her on an assignment. It is you who would face legal consequences if any of these laws are violated.

How to Classify Employees

The American Staffing Association, a membership organization that has served the staffing industry since 1968, states that the misclassification of employees who work through a temporary agency is one of the hottest topics in the industry today. Faced with revenue shortages, some state agencies are scrutinizing employment records more carefully to discover companies that have improperly categorized workers.

Unfortunately, some staffing agency owners have been tempted to bend the rules by classifying workers as independent contractors rather than employees. From their point of view, working with an independent contractor requires less of a commitment as well as reduces the company's tax burden. However, the Internal Revenue Service (IRS) feels quite differently about it. Due to the fact that independent contractors are less likely to report all of their income than other workers, the IRS has a vested interest in ensuring that staffing agency employees are categorized correctly.

In a January 2013 case in New York, a staffing agency classified 35 workers who performed promotional work for a client at a marketing event as independent contractors rather than as employees of the agency. When these workers later filed for unemployment benefits, the New York State Unemployment Insurance Appeal Board investigated the agency and found it to be in violation of the law. As a result, the staffing agency was required to reimburse the state for unemployment insurance it has previously paid to the 35 workers.

Labor Laws and Overtime Pay

Another area where owners of staffing firms can get into trouble is when they refuse to pay workers overtime rates for working more than 40 hours a week. Under the Fair Labor Standards Act, employees who are paid on an hourly basis must receive one and a half times their hourly salary for all hours worked past 40 in one week. For example, if you place someone on a construction job who normally earns $15.00 an hour, you are required to pay $22.50 per hour once that employee has exceeded 40 hours in a seven-day period. The problem comes in when owners of staffing agencies and their clients try to get creative about what constitutes a week.

You are not required to pay overtime rates to employees who are classified as exempt or independent contractors. An exempt employee is one who accepts a position with a monthly or annual salary. He or she may put in more or less hours than 40 in a week and still receive the same paycheck. Although it is rare for an employee who works through a staffing agency to qualify as exempt, mis-classifications do occur. That is why you need to be vigilant about all paperwork that your staff completes on behalf of a contracted worker.

Adherence to Federal Employment Laws

Staffing agencies are held to the same standards as other types of businesses when it comes to complying with federal employment laws. When an applicant applies to your agency, you and your staff are not allowed to make an employment decision based on gender, race or age. The applicant must be considered on his or her qualifications for the position only. After the employee has worked with your organization for awhile, you may become aware of his or her marital status, religion or sexual orientation. These factors can also have no bearing on whether an employee is placed on an assignment, promote, discplined or released from your employment.

You must also ensure that your agency is in full compliance with the Americans with Disabilities Act (ADA) and that it follows all mandates of the Occupational Health and Safety Administration (OSHA). Since you may be held liable if a worker gets hurt on an assignment, you should tour your client's facilities to ensure that they are safe.

Worker's Compensation

The United States Department of Labor requires that all employers purchase worker's compensation insurance, including staffing agencies. However, whether or not your company is required to pay worker's compensation to an injured worker depends on the state where you conduct business. Temporary employees typically have to work for an agency for a set number of hours before they are eligible for worker's compensation. It is important for you to understand the laws of your own state before sending a worker out on his or her first job assignment.

Unemployment Compensation

Although it is more difficult for a person who works through a temporary employment agency to collect unemployment benefits, it is not impossible. The state issuing the benefits takes several factors into consideration, including the following:

  • How many hours the employee has worked for your agency.
  • The average rate of pay over the last several assignments.
  • Whether the employee left a position voluntarily or turned down opportunities to work.
  • If the employee was always available to work and actively seeking job assignments.

In 17 states, a person who normally works through a staffing agency is said to be voluntarily unemployed if he or she does not contact that agency prior to filing for unemployment compensation. In the event that the state subpoenas employment records from your agency, it is important to keep accurate records that demonstrate your staff followed the law.

Contract Disputes

Issues can arise between a staffing agency and its clients when contracts are unclear or deliberately violated. For example, one of your clients may attempt to put a worker on his or her payroll before legally eligible to do so. Many agencies allow clients to hire an employee after paying a separation fee, but that doesn't stop clients from trying to get around it. Other issues that can arise include confusion over non-disclosure agreements and disagreement about a worker's skills and classification. To avoid legal problems, be certain to request the following information from your clients:

  • A complete job description, including skills that are necessary to perform the job successfully.
  • Daily schedule and anticipated length of assignment.
  • Dress code, security information and other miscellaneous details.
  • What the client expects in terms of background checks, drug screening and employment references.
  • How much the employee is to be paid and acknowledgement on how much your agency will receive.

Your portion of the contract should cover buy-out agreements, responsibilities regarding unemployment insurance and worker's compensation, and who to contact if the client has questions or a complaint. The more you lay out in advance, the less likely you are to have a contract dispute later.