Ever since the mid-1980s, companies have rushed to outsource millions of jobs, filling them with temporary workers and self-employed independent contractors. But what began as temp work often has turned into multiyear employment, as companies got hooked on the flexibility and lower labor costs that temps provide.
Now, Corporate America's love affair with contingent workers is running into trouble. The concept of "permatemps" has been hauled into court, most prominently in a suit against Microsoft Corp. and another recently filed by the Labor Dept. against Time Warner Inc. The central question: Who is the real employer of someone who management says is contingent but who remains on the job long term? If it's the company, federal pension law could require it to provide that person benefits, including payments for missed back years, as the courts ruled in the Microsoft case.
The legal issues at stake are still in flux. But if judges continue to side with permatemps, it could trigger costly suits for a wide range of employers that rely on temp agencies and force big changes in the way they employ temps and contractors. "Any company with any sense is going to be aware of these [new legal questions] and is talking to counsel about the potential liabilities," says Ed Lenz, general counsel of the National Association of Temporary & Staffing Services.
The problem is that labor laws weren't written to cover temps who aren't temporary. For workers who switch jobs frequently, it's usually clear that a temp agency employs them--or, if they are independent contractors, that they are self-employed. But it's muddier for permatemps, whose ranks have swollen in the 1990s. Some 29% of workers employed by temp agencies remain on the same job assignment for a year or more, according to the Bureau of Labor Statistics (chart).
The question of who is the primary employer first arose at the Internal Revenue Service. In the early 1990s, it found that many companies were misclassifying employees as independent contractors and not paying payroll taxes on their behalf. An IRS complaint at Microsoft on this issue led to the current lawsuit, filed in 1992. The claim: Many of Microsoft's 6,000 or so temps really are common-law employees of the company. Under the Employee Retirement Income Security Act of 1974 (ERISA), the federal pension law, they would be entitled to benefits that other employees get unless the company's benefit plan specifically excludes them.
The U.S. Court of Appeals for the Ninth Circuit upheld this view last year, and the Supreme Court denied review in January, 1998. On Nov. 17, plaintiffs filed a new suit for thousands of workers who were removed from the original ruling this summer, when the district judge restricted the case to several hundred independent contractors who had worked at Microsoft prior to 1990. "If you really look at what's going on (with the new suit), it appears as if they're saying there's no good reason to have temporary workers at all," complains Sharon Decker, Microsoft's director of contingent staffing.
Microsoft's setbacks have prompted many companies to revisit their policies, say management lawyers. But with the law in a state of uncertainty, company options aren't clear. One course is for an employer to amend its benefit plans to exclude explicitly some workers, such as those on outside payrolls. Still, temps who could prove they were common-law employees could sue for benefits they didn't get before the plan change, says Frederic S. Singerman, an ERISA lawyer in Washington, D.C.
Employers can also take steps to ensure that a court won't find permatemps to be common-law employees. But that may require them to surrender considerable managerial control over long-term temps. Consider San Francisco's Pacific Gas & Electric Co. On Oct. 20, the utility lost a case on appeal when the court ruled that a dozen employees outsourced in 1983 could collect benefits by proving they were common-law employees. Even before the suit was filed, PG&E took steps to make sure its temps were treated differently from other employees. Now, temps aren't supervised by PG&E managers or listed in the employee directory, and they can't use PG&E cars, business cards, or stationery. "You really have to give up direct control to make sure your temps aren't common-law employees," says PG&E staff attorney Maureen Fries.
BIG IMPACT. PG&E isn't the only company facing the prospect of managing its temporary workforce in new, careful ways. In July, Allstate Insurance Co. got hit with a class action claiming that 10,000 temps hired since 1983 were common-law workers. The complaint claims that Allstate controls their hiring, firing, training, and day-to-day management. If the plAintiffs prevail, Allstate may have to give up some of these functions. Allstate lawyer Greg Rohlfing says that, because the company's benefit plans exclude these workers, the claims are meritless.
The Time Warner suit has introduced another issue: government enforcement. While other permatemp cases have been brought by private plaintiff lawyers, Time Warner was slapped on Oct. 26 with a Labor Dept. suit citing violations of the ERISA rights of hundreds of freelance photographers and journalists. The agency had been in heated negotiations with Time Warner for two years and filed suit afterfailing to reach a resolution. Benefits lawyers say if Labor prevails, it may spur a flood of permatemps seeking help from the government.
Microsoft's Decker worries that the new spate of permatemp lawsuits could undo what many see as a mutually beneficial work arrangement. The suits "could take away opportunities for some people, like women who want to take time off," she says. They also "could totally change the way a lot of companies staff their businesses." Indeed, for the many companies that have made contingent workers part of their human resource strategy, the benefits of a more flexible workforce may turn out to carry a steep price.