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Worker Classification Under Title VII

Businesses frequently use temporary workers to perform services or to augment the services performed by their regular employees.  Such businesses may choose to enter into arrangements with staffing companies which employ these temporary workers and assign them to perform defined tasks for the contracting company.  Alternatively, businesses may engage temporary workers directly without using intermediary staffing companies.

While the use of temporary workers has become increasingly more commonplace over the years, courts have struggled to define the legal status of such workers under the patchwork of federal statutes which affect the workplace.  In general, federal statutes impose numerous requirements on the use of workers classified as “employees,” and far fewer, if any, requirements on the use of workers classified as “independent contractors.”  Statutes which include this employee/independent contractor dichotomy include the National Labor Relations Act, the Fair Labor Standards Act, the Social Security Act, the Internal Revenue Code, the Employee Retirement Income Security Act, Title VII of the Civil Rights Act of 1964, the Age Discrimination In Employment Act, the Americans with Disabilities Act, the Worker Adjustment and Retaining Notification Act, and the Family and Medical Leave Act.

Although these statutes contain similar terminology with respect to worker classification, courts and administrative agencies charged with interpreting the statutes have created varying legal standards to determine which workers are to be classified as covered “employees” and which workers are to be classified as independent contractors.  Thus, employers frequently have been left unsure whether temporary workers were covered by one federal statute, but excluded under another.  

Courts have had particular difficulty in determining and applying legal standards for worker classification under Title VII, applying varying tests denominated as the “economic realities” test, the “common law agency” test, and the “hybrid” test, each of which involved intensive inquiries into the specific facts and circumstances of each case.  These unsettled legal standards have led to a steady stream of litigation over the years.  

Recently, in Eisenberg v. Advance Relocation & Storage, Inc., 2000 WL 1915771 (2d Cir. Dec. 26, 2000), the Second Circuit articulated a standard different from the one previously applied for determining worker classification under Title VII.1   In this article, we review the development of the legal standards applied in the Second Circuit in determining worker classification under Title VII and the changes in the law brought about by Eisenberg.  Finally, we include several suggestions businesses may wish to consider to reduce the risk of unexpected liability to temporary workers under federal statutes governing benefits, taxes and employee relations by maximizing the likelihood that temporary workers will not be considered “employees” of the business under these statutes.  

Background
Title VII protects individuals from discrimination in employment.  42 U.S.C. § 2000e et seq.  Although Title VII provides that “individuals” are covered by the law, courts have universally held that Title VII covers only individuals who are “employees.”  For this reason, courts have held that Title VII does not apply to “independent contractors.”  Like other federal statutes regulating the workplace, Title VII offers little guidance in distinguishing between “employees” and “independent contractors” because it defines the term “employee” in a circular fashion as “an individual employed by an employer....”  42 U.S.C. § 2000e(f).2

Courts faced with the task of determining whether workers are “employees” under Title VII and other federal statutes have developed three different tests.3  The “agency test” calls upon traditional common law master-servant principles as found in the Restatement of Agency.  This test emphasizes the putative employer’s “control or right to control both the result to be accomplished and the ‘manner and means’ by which the purported employee brings about that result.” The second test, the “economic realities test,” defines employees as those who “as a matter of economic reality... are dependent upon the business to which they render service.”  Last, the “hybrid test” called for courts to “analyze the ‘economic realities’ of the situation ‘viewed in light of the common law principles of agency and the right of the employer to control the employee.’”  The “hybrid test” is a combination of the “agency test” and the “economic realities test” and emphasizes the right to control the worker.  

For the first two decades after enactment of Title VII, the Second Circuit did not have occasion to decide in any published opinion which of the three tests should be used to determine whether a temporary worker was an “employee” for purposes of Title VII.  Not surprisingly, the district courts in the Second Circuit adopted varying legal standards both in Title VII cases and in cases arising under other federal statutes affecting the workplace.4  There was also little guidance from the Supreme Court as to the proper standards for classification under Title VII.  In 1989, the Supreme Court held in Reid v. Community for Creative Non-Violence, 490 U.S. 730 (1989), that when Congress has offered only a vague definition of the term “employee,” courts should look to common law agency principles for guidance, and specifically to certain factors, in determining whether the individual is an “employee.”5  The Court held that the conventional master-servant common law definition was the most helpful for determining who was an employee for purposes of the “work-for-hire” provisions of the Copyright Act in holding that the plaintiff sculptor was an independent contractor.  Reid, 490 U.S. at 739-40.  In its 1992 decision in Nationwide Mutual Insurance v. Darden, 503 U.S. 318, 322-23 (1992), the Court expanded on Reid when it was called on to define employee for purposes of the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001-1461 (“ERISA”).  The Court held that common law agency principles should be used to interpret the term “employee” under any federal statute with a circular definition of the term unless the statute made it clear that another definition was intended.

Frankel

In 1994, the Second Circuit applied the Supreme Court’s Darden analysis in Frankel v. Bally, Inc., 987 F.2d 86 (2d Cir. 1994), a case brought under the Age Discrimination in Employment Act of 1967, 29 U.S.C. §§ 621-634 (“ADEA”).  This decision foreshadowed the court’s later adoption of the common law agency approach in the context of a Title VII claim in Eisenberg.  

The plaintiff in Frankel was a shoe sales representative who had incorporated himself in order to avail himself of certain benefits offered by Bally.  He then sued Bally for terminating the contract between Frankel’s corporation and Bally.  The district court dismissed Frankel’s suit on the ground that Bally had entered into a sales agreement with “Harold Frankel, Inc.,” rather than Frankel himself.  Accordingly, the district court held that Frankel was not Bally’s employee for purposes of the ADEA.  Id. at 87.  

The Second Circuit vacated the district court’s judgment and remanded for further proceedings, finding that the district court should have used the common law agency test rather than a test based on corporate formalities.  The court stated that Darden’s rejection of using an approach that defined the term “employee” to achieve the remedial objectives of thefederal statute “eliminates[d] the chief rationale for employing a broader test in the context of anti-discrimination legislation....”  Id. at 90.  The court found that Darden dictated application of the common law agency approach as set forth in Reid.  Frankel, however, still left open the question of how the Reid factors would be weighed and did not definitively apply its analysis to Title VII.6

Eisenberg
In Eisenberg v. Advance Relocation & Storage, Inc., 2000 WL 1915771 (2d Cir. Dec. 26, 2000), the Second Circuit confirmed that the common law agency test is the correct legal standard to be applied under Title VII in deciding worker classification.  The court applied Reid, Darden and Frankel, and rejected the other tests that the district courts in the Second Circuit had applied previously.  However, the Second Circuit’s decision in Eisenberg also is significant, perhaps more so, because it gives guidance as to the weight that courts should give to the Reid factors.  

The plaintiff in Eisenberg was hired to work on a “permanent full-time basis” at a moving and storage company after meeting an old acquaintance who worked there.  Id. at *3.  Her job responsibilities were typical of a low-level employee at a moving company.  She was responsible for loading and unloading furniture from trucks at a warehouse and at residences.  The job was not a salaried position.  Instead, Eisenberg was paid by the hour and only for the hours she actually worked.  Id.  No benefits were provided and Advance withheld no taxes from her paycheck.  Direct supervisors gave instructions prior to each job as to what the job entailed and other Advance representatives on-site gave specific instructions as to what tasks to perform.  Eisenberg alleged that while at Advance, she was subjected to sexual harassment by male co-workers.  She complained to an office manager about the harassment and that she had seen Advance employees using cocaine in the warehouse.  The warehouse was closed the next day.  Advance assured Eisenberg that a position would be available to her when the warehouse re-opened provided she did not complain about the harassment.  She did not heed the threat, and instead filed a claim for sexual harassment under Title VII, alleging that she had been terminated in retaliation for her complaints.  The central issue in the case was whether Eisenberg was an employee and therefore had standing to bring the Title VII claim.

The district court found that Eisenberg was an independent contractor, after applying a common law agency test involving application of the Reid factors as formulated in another copyright case, Aymes v. Bonelli, 980 F.2d 857 (2d Cir. 1992).7  The district court stated that “[p]laintiff’s tax treatment and lack of employee benefits weigh heavily in favor of independent contractor status.”  82 F. Supp. 2d at 249-50.  Also important to the district court was the fact that the “plaintiff was only paid for the hours that she worked and did not object to working less than forty hours a week....”  Id. at 250.  While the court acknowledged that “Advance had complete control over the manner and means of plaintiff’s work” and that the case was admittedly a “close call,” the court ultimately found that the Reid factors weighed in favor of a finding that Eisenberg was an independent contractor.  Id.

The Second Circuit reversed, holding that, while the common law agency test was proper, Advance’s tax treatment of and failure to provide employee benefits to Eisenberg was far less important than the fact that Advance had the right to control the manner in which she performed her job.  The court stated that “[t]he District Court did not place the ‘greatest emphasis’ on the first Reid factor, the right to control, as required.”  The court stated that the district court’s emphasis on tax treatment and employee benefits was the result of a mistaken reliance on the Second Circuit’s decision in Aymes v. Bonelli, 980 F.2d 857 (2d Cir. 1992), a copyright “work-for-hire” case.  Eisenberg, 2000 WL 1915771 at *4.  According to the court, the copyright “work-for-hire” context called for a different emphasis because “[w]hile the rights to intellectual property can depend on contractual terms...the right to be treated in a non-discriminatory manner does not depend on the terms of any particular contract.”  Eisenberg, at *16.  The court instead found that the district court’s emphasis on the Aymes decision was incorrect both as a matter of interpretation and on public policy grounds.  The court stated that “workers and firms would be able to devise compensation packages that included a no-benefits clause and a no-tax-deductions clause, thereby all but insuring that workers are characterized as independent contractors, and permitting [the firms] to opt out of the anti-discrimination laws.”  Eisenberg, at *18.

Practice Pointers

The Eisenberg decision confirmed for the first time that the Second Circuit will use a common law agency test in a case brought under Title VII.  Further, the decision sheds some light on how the Reid factors will be weighed by the Second Circuit.

The Eisenberg decision will be particularly significant for businesses that make extensive use of staffing companies which in turn assign temporary workers to perform services for such businesses.  This is because businesses that use temporary workers frequently reserve the right to dictate the day-to-day activities of the temporary workers, while the staffing company or temporary agency provides overall supervision, training, other assignments and/or payroll services, including withholding taxes and providing the temporary worker with workers’ compensation insurance and employee benefits.  Under Eisenberg, temporary workers may argue that such an arrangement in itself is not sufficient to shield the business from the claims by the temporary worker under Title VII because the employment relationship cannot be avoided solely by denying the temporary worker benefits or by failing to withhold taxes.  On the other hand, the business may argue that the meaningful involvement of the staffing company, which does provide supervision, training, and payment as well as employee benefits and the right to terminate employment, distinguishes these temporary workers from the one at issue in Eisenberg.

In order to minimize the risk of liability under Title VII, businesses using temporary workers, staffing companies or professional employer organizations may wish to take some or all of the following steps:

•        Have minimal direct supervision over the temporary worker, which could be accomplished by having the staffing company provide an on-site supervisor who is an employee of the staffing company;

•        create an inference of non-control of the worker by having the assignment be of a fixed duration, with a well-defined end-point to suggest non-employee status;

•        make sure that discipline and discharge is handled by the staffing company and not the client company, including by adopting a written policy specifically prohibiting discipline or discharge of temporary workers by the client company;8

•        make clear to the client company and regular employees that temporary workers are solely the employees of the staffing firm;

•        the staffing company should have the sole responsibility to recruit, hire and train temporary workers and to determine who among its employees are best qualified to perform the services required by the client company, with the staffing company providing qualified individuals who need little training and the client company providing only job specific training if integral to the particular job’s performance;

•        the staffing services agreement should contain a full warranty by the staffing company that it is in compliance with all applicable employment laws and regulations including anti-discrimination provisions.  The staffing company should also represent that it has an anti-harassment policy and an appropriate complaint and remediation procedure;

•        wherever possible, the client company should have tangible indicia of the fact that the staffing company employees are not employees of the client company and will not have access to trade secrets of the client company.  These indicia should include a separate staffing company employee manual, separate I.D. cards and security badges, and exclusion of staffing company employees from client company training, social or other employee functions;

•        the staffing company should have sole responsibility for calculating wages, withholding taxes, making wage and other tax withholding payments as required by applicable law, have the sole responsibility for maintaining benefit plans and promised benefits levels, responsibility for compliance with FICA, unemployment and worker’s compensation coverage, provide worker’s compensation coverage, provide for the client company to be covered so that it has protection of the workers’ compensation exclusivity as a co-employer;

•        all independent contractors and temporary workers should sign waivers of entitlement to any employee benefits from the client company.  Employee benefit plans also should expressly exclude persons the client company considers to be independent contractors and/or temporary workers from participation in such plans.9  Such a waiver might be included in a confidentiality agreement with the temporary worker if such worker will have access to trade secrets of the client company;

•        the staffing company should have sole responsibility for I-9 verification, compliance and record keeping.
Eisenberg should serve as a reminder to businesses that temporary workers whom the businesses do not consider their “employees” may unexpectedly be reclassified as such after the fact by courts applying varying legal standards.  As in Eisenberg, such retroactive reclassification may lead to liability under federal law.  Thus, businesses would be well advised to analyze their arrangements with temporary workers and/or staffing companies and weigh the risks of such unexpected liability against the benefits of using temporary workers.  

1 .        In O’Connor v. Davis, 126 F.3d 112 (2d Cir. 1997), cert. denied, 522 U.S. 1114 (1998), a Title VII case, the Second Circuit in dicta stated that the common law agency test would apply, but never reached the issue because the plaintiff in the case was a student volunteer and the court therefore found no employment relationship due to lack of remuneration.
2.        Tadros v. Coleman, 717 F. Supp. 996 (S.D.N.Y. 1989) (“Title VII may define ‘employee’ with ‘magnificent circularity’...but [t]he word...is still...circumscribed by means reasonably related to that word”), cert. denied, 478 U.S. 869 (1990).
3.        Frankel v. Bally, Inc., 987 F.2d 86, 89 (2d Cir. 1993).
4.        Compare Tadros v. Coleman, 717 F. Supp. 996, 1004 (S.D.N.Y. 1989) (Patterson, J.) (applying hybrid test to Title VII action), aff’d, 898 F.2d 10 (2d Cir.), cert. denied, 498 U.S. 869 (1990); Amarnare v. Merrill Lynch, 611 F. Supp. 344 (S.D.N.Y. 1984) (Weinfeld, J.) (court used the hybrid test to find that temporary employee was an employee of both temporary agency and Merrill Lynch and therefore had standing to sue under Title VII), aff’d, 770 F.2d 157 (2d Cir. 1985); Beverly v. Douglas, 591 F. Supp. 1321 (S.D.N.Y. 1984) (Weinfeld, J.) (court used hybrid test to hold that position of volunteer attending physician would not have been an employment relationship and therefore doctor who had been denied position did not have standing under Title VII); with Hill v. New York City Bd. of Educ., et al., 808 F. Supp. 141 (E.D.N.Y. 1992) (Glasser, J.) (applying economic realities test to Title VII action) and Clancey v. American Management Ass’n, Inc., 781 F. Supp. 286, 288 (S.D.N.Y. 1992) (Freeh, J.) (applying econ
omic realities test to ADEA action).
5.        These are the so-called “Reid factors.”  The Court stated the following:  “In determining whether a hired party is an employee under the general common law of agency, we consider the hiring party’s right to control the manner and means by which the product is accomplished.  Among the other factors relevant to this inquiry are the skill required; the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party; the extent of the hired party’s discretion over when and how long to work; the method of payment; the hired party’s role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the hired party.” Reid, 490 U.S. at 751-52.  See also Restatement (Second) of Agency § 220 (1958).
6.        See footnote 1.
7.        In Aymes, a copyright “work-for-hire” case, the court found that five of the Reid factors were the most important in determining who is an employee.  They are:  (1) the tax treatment of the hired party, (2) the skill required by the position, (3) the provision of employee benefits, (4) the hiring party’s right to control the manner and means by which the product is accomplished, and (5) whether the hiring party has the right to assign additional projects.  The court thought these factors would be significant in every situation.  The district court in Eisenberg agreed with this emphasis.  
8.        This does not mean that the client company cannot make on-the-spot corrections or recognize good performance.  However, in most instances, violations of the client company’s own disciplinary policies and procedures should be reported to the staffing company, with the staffing company solely responsible for traditional human resources functions, including determining and administering the appropriate discipline.  With respect to terminations, the client company should contact the staffing company if the need arises to terminate the assignment of a contingent worker with the client company.  The decision to terminate the contingent worker should remain with the staffing company.  
9.        See Vizcaino v. Microsoft Corp., 120 F.3d 1006 (9th Cir. 1997) (en banc) (computer programmer “freelancers” held to be common law employees and therefore eligible for ERISA plan which explicitly included all common law employees, notwithstanding the fact that they had signed agreements designating themselves as independent contractors and ineligible for plan benefits), cert. denied, 522 U.S. 1098 (1998), on remand, 1998 WL 122084 (W.D. Wash. 1998), petition for writ of mandamus granted and remanded, 173 F.3d 713 (9th Cir. 1999), opinion amended and petition for reh’g en banc denied, 184 F.3d 1070 (9th Cir. 1999), cert. denied, 120 S.Ct. 844 (2000); but see Trombetta v. Cragin Federal Bank for Savings Employee Stock Ownership Plan, 102 F.3d 1435 (7th Cir. 1997) (court upheld the denial of benefits under an ERISA plan to loan originators who worked under contracts designating themselves as “independent contractors” rather than “employees”).

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