United States: Staffing Agencies Using Independent Contractors Face Misclassification Liability And Expose Clients To Undue Risks

Last Updated: January 25 2013
Article by Richard J. Reibstein, Lisa B. Petkun and Andrew J. Rudolph

This month there have already been two cases in the staffing industry that highlight the risks posed to that industry and their clients where the workers being referred are paid on a 1099 basis. One case arose in New York and involved workers referred to clients holding marketing events that required extra staff for promotional work. The other case arose in California and involved customer service and technical workers referred to AT&T and Apple.

Many staffing and referral companies refer only W-2 employees to their clients or send only 1099ers who are bona fide independent contractors (ICs). There are, however, a number of staffing companies that send misclassified common law employees to their clients but pay them as if they were ICs. That creates substantial exposure for misclassification liability for the staffing companies and their clients – exposure that can be minimized or eliminated.

The New York Case:

On January 3, 2013, the New York State Unemployment Insurance Appeal Board issued identical decisions in 35 separate cases holding that the workers supplied by a staffing company to a client to perform promotional work for a marketing event were employees and not independent contractors. See, e.g., Matter of Appeal Board No. 556309. Each of the 35 cases involved claimants who sought unemployment benefits despite being treated as 1099ers.

The Appeal Board was not persuaded that the workers were independent contractors simply because they could decline assignments and could work for other agencies. In ruling that all 35 workers had been misclassified, the Appeal Board relied on five other administrative and court cases where workers in the promotional and event marketing industry were found to be misclassified as ICs:

  • one case involved a "promotional staffing company,"
  • another case ruled against a company that "provided models for trade shows and other 'events' where promotional materials were handed out,
  • the third case involved a promotional "marketing company,"
  • a fourth case dealt with misclassified appliance demonstrators, and
  • the fifth case involved a staffing agency "which provided models to stores for make-up demonstrations and sales promotions."

As a result of the January 2013 decision, the staffing company was held liable for contributions for all similarly situated workers.

The California Case:

On January 9, 2013, customer service and technical support service workers servicing AT&T and Apple settled their class action IC misclassification lawsuit with their staffing company, Arise Virtual Solutions, for $1.25 million. On that date, a federal district court in California granted preliminary approval of a class action settlement alleging that the staffing company misclassified over 200 of its service providers as independent contractors instead of employees.

The original lawsuit had sought damages against Arise, AT&T, and Apple for unpaid overtime, failure to reimburse workers for required business expenses, and failure to provide meal periods and rest periods under state law. After considerable motions and the filing of new complaints only against Arise, the parties settled. The $1.25 million settlement is subject to a fairness hearing scheduled before the court in May 2013. Perry v. Arise Virtual Solutions, No. C 11-01488 YGR (Jan. 9, 2013) (N.D. Cal.).

The settlement was reached after extensive discovery was taken including depositions and the exchange of over 81,000 pages of documents in response to over 300 document requests. AT&T and Apple are not parties to the settlement. Arise denied any wrongdoing in the settlement papers.

This case is one of a number of "class action" type cases filed against Arise for worker misclassification.

In October 2012, a lawsuit was filed against Arise in federal court in Florida alleging that it violated the federal minimum wage law. Dowell v. Arise Virtual Solutions, No. 12-cv-61947 (S.D. Fla.). That lawsuit alleged that Arise failed to pay its "individual business owners," "virtual service corporations," "client service professionals," "partners," and other independent contractors for time spent in extensive training teaching them to become customer service representatives for specific customers of Arise and for time they were on call time waiting for work. The lawsuit alleges that those independent contractors are employees under the federal Fair Labor Standards Act (FLSA) because they are trained, directed, and controlled in the manner in which they performed their work. In addition to required training, the customer service representatives were allegedly required to follow scripts when speaking on the telephone to customers for Arise's clients, which are cited as American Automobile Association, Apple, Disney, and Carnival Cruise Line. This case was recently withdrawn "without prejudice" to any party after Arise filed a motion seeking to arbitrate the claims pursuant to an arbitration clause in its agreements with the customer service representatives or their corporate entities.

Another lawsuit was filed against Arise in the same federal court in October 2012 with similar allegations: the customer service representatives retained by Arise are not independent contractors but rather employees who are directed and controlled in the manner in which they performed their work, yet they were not paid for required training courses and other time worked without compensation – all allegedly in violation of the FLSA. These customer service representatives provided services for Carnival Cruise Lines and AT&T, the complaint alleges. Otis v. Arise Virtual Solutions, No. 12-cv-62143 (S.D. Fla.). No answer or motions have yet been filed by Arise.

Analysis and Observations:

1. IC misclassification claims create an array of legal proceedings. These types of cases represent two of the many types of legal proceedings that staffing companies are increasingly facing when the personnel they refer to clients are not treated as W-2 employees. As noted above, there is no legal prohibition on staffing companies referring to their clients workers treated as 1099ers where those individuals meet the tests for ICs under applicable federal and state laws. However, administrative proceedings and lawsuits alleging IC misclassification are more prevalent, and more likely to create liability for the staffing company or the client, where there is considerable direction and control allegedly exercised by the staffing company, or its client, over the manner and means by which the workers perform their services. Other types of IC misclassification proceedings besides unemployment administrative matters and class action lawsuits include governmental audits – by the IRS, workers compensation boards, and/or the federal and state Labor Departments.

2. The corporate status of the IC does not eliminate misclassification liability. These cases also show that IC misclassification claims are not eliminated simply by entering into a service contract with a corporate entity. In the first of the two cases against Arise in Florida, the lawsuit claimed that the corporate status of the customer service representatives were allegedly a sham to disguise Arise's alleged IC misclassification. Lawsuits for worker misclassification continue to be brought even where the worker has created a business corporation and is providing services through his or her company. Staffing companies and other businesses that enter into IC and other types of agreements with corporate entities operated by individuals are not immune from worker misclassification lawsuits. Indeed, a number of state laws and court decisions disregard the corporate form of the IC and focus on whether the business can establish that the worker meets the applicable IC test.

3. Three costly observations. First, as one can imagine by the extraordinary amount of discovery that transpired in the California case involving Arise Virtual Solutions, the legal fees incurred in defending class action-type lawsuits are extraordinary and can be even more costly, in some instances, than the damages sought or the amount of a settlement, even a 7-figure settlement as in the Arise case.

Second, client companies can suffer as well from IC misclassification lawsuits , even when they are not the primary target. In the Arise cases, the client companies were likely to have incurred or continue to incur substantial legal costs themselves and may be subject to further legal claims. Moreover, where the client company itself directs or controls the workers found to be misclassified as ICs, it may be found to be a joint employer with the staffing company or the sole employer of the workers. In either instance, client companies run the risk of joint and several liability with the staffing company, or liability on its own, for violation of labor laws or for failure to withhold taxes and pay for unemployment and workers compensation coverage. Indemnification clauses do not offer complete, or sometimes any, protection to corporate clients, especially where the staffing company does not have the financial resources to make the client whole or where the indemnification clause language favors the staffing company. In contrast, where an indemnification clause favors the client, it can create potentially sizeable exposure for a staffing company, even if it exercises little or no direction or control over the workers, if they are directed and controlled by the client company to such an extent that they may succeed in showing that they are not ICs.

Third, the unfavorable decision by the New York Unemployment Insurance Appeal Board, described above, may lead to the issuance of additional notices to that staffing company from affected state and federal agencies. The staffing company involved should not be surprised if, within the next 12 months, it receives an assessment for penalties and interest from the state unemployment office, an assessment of penalties and interest charges from the state workers compensation board, and an assessment from the state tax commissioner and/or the IRS. If the promotional workers also claim that they regularly worked more than 40 hours per week, overtime claims may also be asserted by the state or federal Labor Departments or by the workers themselves in the state or federal courts. A lawsuit may also be filed by the workers claiming they should have been covered under the employee benefit plans or fringe benefit programs of the staffing and/or client companies, now that they have now been re-characterized by the Appeal Board as employees.


As noted in our White Paper, the current regulatory landscape involving IC misclassification has become far more unfriendly to those businesses that are based on an IC-model or rely on the use of ICs to supplement their workforce. Congress has yet to pass any IC misclassification legislation despite introducing bills each year since 2007; however, in each of the last five years, more and more states have passed laws designed to curtail the misclassification of ICs. The number of states has now reached 24. The U.S. Department of Labor and IRS have joined forces in a Misclassification Initiative and by increased enforcement, while state governments have formed task forces to crack down on businesses that should, but do not, pay state payroll or unemployment taxes or fail to provide workers comp coverage for workers who qualify as "employees" under the state labor, tax, and workers comp laws.

IC misclassification liability, though, can be eliminated or minimized through IC Diagnostics" and other compliance tools that provide businesses with the means to assess and enhance their level of IC compliance. As noted in our White Paper on the subject, businesses have alternative means to minimize or eliminate exposure: restructuring, re-documentation, reclassification, or redistribution - and all but the last alternative are available to companies in the staffing industry.

Cases like those reported above in New York and California are a clarion call to those companies in the staffing industry that have yet to take meaningful steps to reduce or eliminate this manageable risk. Clients of staffing companies should likewise take heed that redistribution of their workforce to staffing companies that are not IC-compliant may not be a sound business option. Further, use of an IC-compliant staffing firm does not, by itself, eliminate IC misclassification exposure for client companies unless they, too, take steps to enhance their own IC compliance in relation to the workers referred to them by a staffing company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Lisa B. Petkun
Andrew J. Rudolph
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
Email Address
Company Name
Confirm Password
Mondaq Newsalert
Select Topics
Select Regions
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions