Joint Employment as a Desired Outcome
November 27, 2005
During one of our telephone conver- sations about setting up the new domain name and blawg platform, George asked me what it is, exactly, that my employer sells. When I gave him my usual brief explanation, he asked me how my company’s clients avoid creating joint employment situations. Not being a lawyer, I wasn’t able to answer him right away, but a couple of days later I caught one of our directors and repeated the question.
His answer boiled down to two words: they don’t.
The entire idea behind Professional Employer Organization (PEO) services is the sharing of employer liability through joint employment (often referred to as “co-employment” in the industry). For business utilizing a PEO, joint employment is the desired outcome, not a thing to be avoided.
For anyone versed in employment law, this statement seems counterintuitive. However, the PEO model has one additional, extremely critical, factor that turns the entire situation on its ear and creates a product that many businesses, particularly smaller ones, can find useful.
That additional factor is the contract that exists between the PEO and the client company. The contract explicitly outlines which party is responsible for which duties. The contract also spells out who, exactly, is liable for what type of adverse judgment. If an employee of a client company then sues, the employee can legally go after both the PEO and the client because both are considered employers. Judgment, if any, is rendered against both PEO and client, and that ends the employment lawsuit.
However, the existence of the contract between the PEO and the client takes the situation a step further and details whether or not the client or the PEO have recourse to each other for the loss. That recourse is governed by contract law as opposed to employment law. If the service contract is properly developed, the financial risk of being an employer can be substantially reduced, resulting in a benefit to the client (provided the client has not acted against the PEO’s advice). In other words, a PEO contract takes much of employment liability out of the courtroom and instead places it on the contract negotiation table.
Note: George adds that at times labor and employment law disregards conventional legal doctrines. For example, those with a little knowledge of business law are often shocked to discover that at times employment law obligations and claims are sometimes decided without regard to the normally sacred distinct identities of different corporations.
George speculates that it is not unthinkable, though unlikely, that such recourse contracts may not always be given full effect in employment situations. He also notes that labor law obligations such as the duty to bargain cannot be contracted away.
Catherine answers that this is why unionized companies often cannot fully benefit from the services of a PEO. However, contracting with a PEO can actually help to forestall union organization by putting good human resources practices into place as a pro-active measure. One major reason employees unionize is frustration with the company environment, and a competent HR practitioner (who, among other things, can assist in fulfilling the duty to bargain) can alleviate much of this frustration.
George’s comment continues: This is in no way intended to detract from the very real benefits to many businesses from utilizing a PEO; just to point out that in some circumstances some risk of liability remains.
PEOs also provide many of the services associated with other types of outsourced human resources: combination of small business employers into a larger group that can usually negotiate more favorable benefits contracts; provision of payrolling services; and access to professionals in the various subfields of human resources. In some states (laws vary) PEOs can even help to reduce a company’s workers’ compensation rating, resulting in lower premiums for coverage.
However, the main selling point of a PEO (versus outsourced HR, which is usually a little less expensive) is the co-employment relationship and shared liability for adverse employment actions. This can be very valuable to a business that is facing a huge insurance premium for employment practices liability insurance — or that wishes to pro-actively address the liability issues rather than face a significant judgment for an unintentional error.
Photo credit: bluesox via flickr
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