Term Limits for Contingent Workers: Urban Legend or Necessary Fix?

Many companies that use contingent workers maintain policies that limit the duration of those workers' services. Under these policies, when a contingent worker reaches a prescribed time limit, that person's services must be terminated automatically, regardless of the person's job performance, and a replacement worker must be found or assigned by a contingent labor supplier.

While such term limiting policies may be well intended, they are not grounded in well-defined legal rules. As a result, there is little consistency in the policies that staffing clients have imposed. Some companies require replacement of contingent workers after a certain number of hours worked, but the maximum number of hours varies greatly, from just under 1000 to 4160, with many different rules in between. Others link limitations to the calendar, such as with 12-, 24-, or 36-month limits. After contingent workers are removed, additional rules may govern how soon they may return, varying from 31 days later, to one year later, to never.

Determining whether joint employment relationships exist for the purpose of legal liabilities is a fact-specific inquiry. Certainly working engagements lasting many years will be scrutinized by courts and by federal and state agencies. However, for most employment claims, it is the level of control exercised over the worker that is determinative of liability, not the length of the relationship.

Potential liability for Family and Medical Leave Act (FMLA) and benefits plans, due to misclassification, is the most common explanation for contingent worker term limits. Because eligibility for FMLA and many benefits are triggered by the length of employment and the number of hours worked, universally enforced term limits can admittedly limit or eliminate exposure for these narrow issues. However, term limits alone are not going to insulate staffing clients from legal liability for the vast majority of employment law claims. Further, these automatic replacements are unpopular with nearly everyone involved. They raise recruiting and training costs, can create discontinuity of service, raise special employment law issues, and (perhaps worst of all) systematically deprive high-performing workers of their ongoing employment for reasons that seem unjust and irrational to them. The questions are: "Are term limits for contingent workers necessary – or even helpful?" "Can the legal exposures be adequately mitigated in other ways?"

Where Term Limits Came From

Term limits arose from persistent concern about the May 1999 decision in Vizcaino v. Microsoft,1 in which independent contractors and temporary employees claimed a right to receive the benefits that Microsoft provided to its directly employed workers.

An often overlooked consideration is that Microsoft actually won almost all of the issues, including its right to exclude contingent workers from its retirement and welfare plans. However, Microsoft did ultimately agree to a $97 million settlement related solely to its stock purchase plan, which is a kind of plan that most companies do not have. Notably, Microsoft conceded early in the case that the contingent workers should have been treated as employees. It is possible the result would have been different if it had not done so. The publicity about this case went viral in the legal, human resources, and benefits communities, and many staffing clients quickly imposed term limit policies as "feel good" protection against the risk of benefit claims by such contingent workers, which have come to be called the "retrobenefits" issue.

Are Retrobenefits Claims a Serious Risk?

To win a retrobenefits case, plaintiffs must prove both of two points.

First, a retrobenefits plaintiff must prove that contingent workers assigned or contracted to work in the staffing client's business are its common law employees. As long as the parties to the working relationship have exercised proper care in relation to the applicable contracts, policy manuals and the day-to-day control over the workers, this may be a difficult burden for the plaintiff to meet.

Second, even if retrobenefits plaintiffs can prove that they are common law employees of the staffing client, they must also prove the client's benefit plans cover them. Since there is no requirement for employers to provide these benefits, no...