Independent Contractors, Subcontractors, Temporary Workers, and OSHA

Gary Auman

Gary Auman (www.dmfdayton.com) is a Partner in the law firm of Dunlevey, Mahan & Furry in Dayton, Ohio. He graduated with an electrical engineering degree from the University of Louisville in 1969, and a law degree from The Ohio State University in 1976. Since then, his practice has focused on defending employers in workers’ compensation and OSHA cases. In 2002, Mr. Auman was awarded the Distinguished Service to Safety Award by the National Safety Council. He has worked with OSHA in its development of safety and health standards, and he has defended OSHA cases in several federal appellate courts. Mr. Auman also represents 4 national and regional trade associations in the construction industry. He can be reached at gwa@dmfdayton.com.

December 1, 2014

Many contractors are increasing their use of independent contractors, subcontractors, and temporary workers, for a variety of reasons. The most commonly cited reason is the need for someone with certain expertise for a special project or task. Of course, temporary workers are also frequently used to replace workers who are temporarily unavailable to do their jobs. As the regulatory environment becomes increasingly stringent, and as workers’ compensation insurance premiums continue to increase, some contractors/employers are looking at more innovative ways to reduce their exposure to the regulators and avoid increases in workers’ compensation insurance premiums. Some companies choose to use temporary workers—as well as independent contractors and subcontractors—to avoid increasing their payroll (workers’ compensation premiums are mostly payroll based), to avoid the need for safety training, and to escape the need to comply with different employment laws. However, employers are responsible for the safety of temporary workers. Recently, the Occupational Safety and Health Administration (OSHA) weighed in on this practice and initiated steps to provide more protection for temporary workers. The first step in understanding the requirements is to recognize that there are differences in the cases of using an independent contractor, a temporary worker, and a subcontractor.

Independent Contractors

Some companies may choose to reduce workers’ compensation premiums by releasing regular employees and using independent contractors. Like temporary workers, independent contractors work under a contract for hire. In this way, a company can potentially use the same employees it just released, but pay them under an IRS 1099. This avoids including their wages in payroll, and therefore having to pay Federal Insurance Contributions Act, withholding taxes, and providing for unemployment coverage. Certain employers may think that under this scenario there is no need to worry about any of the employment laws, such as the Americans with Disabilities Act, the Fair Labor Standards Act, or the Family and Medical Leave Act. This approach may seem to work, but it seldom does. Issues can arise if there are injuries or safety complaints, or if an independent contractor feels that he or she is not being treated fairly, or is being given less favorable treatment than employees still on the payroll.

In these scenarios, workers’ compensation is the most frequent cause of difficulties. Although companies should try to ensure that independent contractors have workers’ compensation coverage, many never do. When an independent contractor is injured, he/she will file a claim against the contracting company’s policy. When the company argues that the independent contractor is not its employee, the working arrangement comes under closer scrutiny. While the law addressing this issue from a worker’s  compensation perspective may differ from state to state, companies may be surprised to find that they will still be held responsible by OSHA for the safety of their independent contractors under the multi-employer work site doctrine, even if they are not responsible for them as employees.

While the laws on this issue do vary, some basic requirements must be met if a company wants to be in a strong position to be able to argue that the independent contractor is not its employee:

  • Companies should have a written agreement with the independent contractor setting out the terms of the business relationship between the parties.
  • Companies must recognize that they cannot set an independent contractor’s schedule. If it is necessary that the independent contractor conform to certain work scheduling issues, the point should be covered in the contract.
  • Companies should not direct an independent contractor in how he or she performs the work. You may set the parameters for the final acceptable work product, but not the means of accomplishing it.
  • Ideally, independent contractors should provide their own tools and equipment; you may provide the materials to be installed.
  • The independent contractor should have the freedom to accept work from others and may be gone from the job site at times that the contracting company did not anticipate. As long as the independent contractor meets his/her contractual deadlines and workmanship, you cannot object.

While there are other points to consider regarding the use of independent contractors, these are the most significant.

Even if you are using independent contractors properly, you may still be held responsible for their safety by OSHA. For example, if an independent contractor complains about a safety concern, and the company’s response is to release him/her from the contract, it is possible that the independent contractor could bring an OSHA retaliation complaint against the company under Section 11(c) of the federal Occupational Safety and Health Act. If companies do everything correctly, they may avoid the workers’ compensation issue, but in doing so, they open themselves up to losing their employer immunity and may potentially expose themselves to a lawsuit alleging that their negligence led to the injury of the independent contractor.

If a company has not maintained an appropriate distance from independent contractors by following the aforementioned steps, the independent contractor may be considered the employee of the employer. Under such a set of circumstances, the employer may find itself having workers’ compensation as well as safety responsibility for the independent contractor. Following all the necessary steps to maintain appropriate separation between yourself and independent contractors is extremely difficult and often costly. Given these concerns, a company should consider the wisdom of trying to reduce the number of employees by replacing them with independent contractors. It is best to discuss the use of independent contractors with your attorney before you choose this option.

Temporary Employees

Temporary employees are often used to fill labor gaps, such as when regular employees are ill or on vacation. OSHA has long been concerned about the treatment of temporary employees and launched its Temporary Worker Initiative (TWI) on April 29, 2013. At first, the initiative did not make much traction with employers; so on July 15, 2014, OSHA issued a memorandum to all regional administrators setting out the policy background for the TWI. In this memorandum, OSHA announced that it was going to treat the host employer and the staffing agency as joint employers for the purpose of providing a safe working environment for temporary employees. The memorandum also defined “temporary workers” as workers who are hired and paid by a staffing agency, and supplied to a host employer to perform work on a temporary basis. No length of time is specified for the determination of “temporary.”

Temporary Worker Protections

In the July 15 memorandum, OSHA stated that it is a fundamental principle that temporary workers are entitled to the same protections under the Occupational Safety and Health Act as all other covered workers. OSHA further stated that any contractual allocation of responsibilities between the staffing agency and the host employer may not discharge either party’s obligations under the Occupational Safety and Health Act. In other words, host companies cannot avoid their responsibilities to provide temporary workers with a safe workplace by using certain language in their contract with the staffing agency. This contract can be used, however, to define the agency’s responsibility to provide temporary workers who have received general and/or specific safety training. Thus, it is advisable for companies to specify in the contract exactly what safety training it wants a temporary worker to have when he or she arrives at the job site.

The OSHA memo provides the example of requiring the staffing agency to see that any temporary employee it sends to a site has received general safety and health training, with the intention that the company engaging the temporary worker’s services will provide any site-specific safety training. General safety and health training could include basic training on general topics such as personal protective equipment (PPE), safety data sheets, basic fall protection, and hazard recognition. Even if a company covers this in a contract, however, it cannot ignore the responsibility to ensure that all employees on its work site have received necessary training and are in compliance with all safety rules and standards.

OSHA Establishes Joint Responsibility

Of interest in the memo is the statement by OSHA that while the host employer has the primary responsibility to determine hazards in its workplace, the staffing agency must ensure that it does not send workers to workplaces with hazards from which they are not protected. Note, though, that if OSHA visits a job site with temporary workers on it, and the compliance officer determines that the temporary workers are exposed to a violative condition, the compliance officer will consider issuing citations to either or both employers—contract notwithstanding. Further, in its memo, OSHA reminds its regional administrators that “temporary workers have the same rights and protections against retaliation as all other covered workers.” OSHA indicates that both the staffing agency and the host employer should advise temporary workers on how to report injuries, illnesses, workplace safety concerns, and the protections they are afforded for doing so under the federal Occupational Safety and Health Act.

The question remains as to how host employers and staffing agencies should deal with this new initiative. On August 25, 2014, OSHA published an initial list of recommended practices for both staffing agencies and host employers. This list is several pages long, but here is a summary of the key responsibilities for host employers:

  1. Identify to the staffing agency the tasks the temporary worker will be expected to perform and any PPE that will be necessary. The parties should agree in their contract who will provide the required PPE.
  2. The parties should agree on a procedure to share injury and illness information, and specify it in the contract.
  3. OSHA requires that injury and illness records be maintained by the employer who is providing the day-to-day supervision. (29CFR 1904.31(b)(2))
  4. The host employer is required to set up a method for employees to report work-related injuries and illnesses promptly, and to inform each employee of this procedure. (29 CFR 1904.35(b))
  5. Host employers should provide temporary workers with safety training that is identical or equivalent to that provided to their own employees.
  6. The host employer should provide the temporary worker with site-specific safety and health training, and project orientation.

In light of the various memoranda and recommended guidelines recently published by OSHA, it is apparent that the host employer is required to treat temporary workers the same as they do their own workers, from a job site safety perspective. While host employers can contractually require the staffing agency to provide basic safety training—and even to supply needed PPE—in the case of an OSHA inspection, the host employer will be measured against what it has or has not done to provide all temporary workers with a safe work environment. This includes confirming that the training the staffing agency is contractually required to provide all of its employees before they are sent to your job sites was performed effectively, and that all workers sent to a job site by the staffing agency have the requisite safety knowledge. Host employers should also confirm that any PPE the temporary workers bring to the job site is the correct PPE for any job site hazards and is in good condition. Any temporary worker who comes to a job site with a high heat index environment will also have to be properly acclimatized to that environment in accordance with your heat-illness prevention program. Those workers will also have to be trained under your heat-illness prevention program.

The list of all the actions host employers must take with regards to temporary workers is too extensive to cover completely, but a good rule to follow is: Treat all temporary workers as though they are regular employees. This will help ensure compliance with the TWI.

Subcontractors

This may be the most straightforward of all 3 situations. Typically, a contractor hires a subcontractor to perform a specific task under an existing contract. Usually, there is a written agreement setting out the specific duties the subcontractor is to perform. Also, usually, the subcontractor is another company, not an individual. In most cases, it is obvious that the subcontractor is not being hired as an individual to fill the role of the contractor’s employees.

In the case of a subcontractor with a written contract, there should be no concerns with the employees of the subcontractor being considered employees of the contractor. That is, there is little likelihood of such confusion as long as the contractor maintains an arm’s-length relationship with the subcontractor. As the contractor, your site supervisor should not deal directly with the employees of the subcontractor. Your site supervisor should work through the subcontractor’s site supervisor. In the alternative, your site supervisor should work through the home office of the contractor to get to the subcontractor. When working with a subcontractor, always be sure that your contract requires the subcontractor to carry its own workers’ compensation coverage, provide proof of coverage, and keep that proof of coverage up-to-date. In most states, workers’ compensation insurance is renewed annually, so you want to be sure you get a new certificate of coverage by the renewal date. Having no proof of coverage should put the subcontractor in breach of contract, which should be enforced.

In most states, the employer is immune from lawsuits by an employee as the result of his or her on-the-job injury outside of workers’ compensation. But when an employee of a subcontractor is injured, he/she may try to file a negligence lawsuit against you (the contractor). Since the employees of the subcontractor are not your employees, you will not enjoy any immunity for liability that might be extended to you in the state in which you are working, outside of workers’ compensation for your employees. There are times that a contractor tries to get the advantage of the employer immunity in workers’ compensation by requiring that it be listed as an additional insured on the subcontractor’s workers’ compensation insurance policy.

Usually this is not permitted, as workers’ compensation is an employee benefit under state law; but even if the contractor is able to get listed, that act usually will not create an employer-employee relationship for workers’ compensation immunity.

Conclusion

Trying to reduce payroll by reducing your regular workforce and operating with independent contractors has many risks. Operating even slightly within a true arm’s length with your independent contractor can expose you to being declared the independent contractor’s employer; if you are declared the employer, you will be subject to all of the workers’ compensation costs associated with any injuries suffered by the independent contractor, and may find yourself having to self-insure the workers’ compensation claim. You may also find yourself involved in litigation on other employment-related issues that may arise as you try to prove the independent contractor relationship.

The use of temporary employees is a better solution to reduce your payroll as there are clear lines regarding the employer-employee relationship if you use a temporary employee services company. When you use temporary workers under a contract with a staffing agency, there is not likely to be any question concerning the employer-employee relationship for workers’ compensation issues. On the other hand, you will be exposed to other potential third-party actions by an injured temporary worker, as well as all of the requirements established by OSHA to protect temporary employees. A subcontractor relationship can provide the most straightforward solution, but you should make sure you are protected by including all the necessary precautions in your subcontract agreement—including requiring updated proof of workers’ compensation insurance—and maintaining appropriate communication channels to ensure that arm’s-length distance with your subcontractor’s employees.