Question 4: In the typical staffing firm arrangement, what is the likelihood that the staffing firm is the common law employer of the workers on its payroll?
Answer: Virtually every case and revenue ruling that has considered this issue, going all the way back to pre-ERISA cases, has held that the recipient is the true common law employer, and not the staffing firm. There are exceptions, but they are rare.
Most cases have been based on the 20-factor test of common law employee status. This test was developed to distinguish between an independent contractor and an employee. It is not terribly well suited to differentiating between two potential employers (the staffing firm or the recipient), one of whom is clearly the employer of the worker. Nonetheless, in decision after decision, courts have looked at the facts and circumstances in light of traditional common law factors and held that the recipient is the true employer. What does that make the staffing firm? It is a payroll agent, perhaps -- but certainly not the employer.
A recent case took a different approach but arrived at the same conclusion. In a 1998 district court decision involving Microsoft, the court noted:
This does not purport to be a complete list of factors. Other factors might include whether the agency is liable for payment of payroll, payroll taxes, and benefits, even if the agency is not reimbursed by the client; the extent of supervision provided by the agency; the extent of any training the agency provides to the worker; the agency's ability to reassign the worker to other clients; and whether the agency or the client determines pay increases for the worker.
Some of the traditional factors simply cannot be used in the present analysis. . . . Employer control is not always an appropriate basis for distinguishing a temporary and a regular employee. . . . In the Court's judgment, the factors to consider in determining whether a "temporary employee" is a common law employee of the client company [the recipient] include (1) whether the client or the agency [the staffing firm] recruited the worker, (2) the extent of the training that the client provides to the worker, (3) the duration of the worker's relationship with the client company, (4) the client company's right to assign additional projects to the worker, and (5) whether the client company may influence the relationship between the worker and the agency.
In any event, the worker is a common law employee of the recipient (client) under most staffing firm arrangements, whether you use the Microsoft analysis or the traditional common law analysis. There are notable exceptions, such as a traditional "temp" agency that sends people to a variety of short-term assignments or a nurses registry. However, the average situation in which an employer leases most of his staff from a staffing firm almost always leaves that employer as the common law employer, not the staffing firm.
"Couldn't you have a situation in which both the staffing firm and its client are common law employers?"
No court and no regulation recognizes such an arrangement. It is true that for payroll tax purposes, a paymaster may be regarded as an employer, but that does not make the paymaster the common law employer for plan purposes.
If the staffing firm is the employer, then the staffing firm can set up a plan for the workers, and the workers could be leased employees of the recipient. If the recipient is the common law employer, then the staffing firm cannot set up a plan (other than a multiple employer plan, cosponsoring with the true employer). Moreover, the workers are not leased employees, and there is no basis for offsetting contributions to a plan maintained by the staffing firm.
These issues are discussed in more detail in Chapter 4 of my book, Who's the Employer?.