Has the Fifth Circuit opened door for potential liability of staffing companies?

In Burton v. Freescale Semiconductor Inc. and Manpower of Texas, LP, the Fifth Circuit reversed the district court’s grant of summary judgment for two employers in a staff-leasing/joint-employer relationship.

The Fifth Circuit’s New Test for Staffing Company Liability In Burton, the Fifth Circuit adopts the Seventh Circuit’s position that a “staffing company is liable for the discriminatory conduct of its joint-employer client if it participates in the discrimination, or if it knows or should have known of the client’s discrimination but fails to take corrective measures within its control.”

Although the Burton case dealt with the “participation” prong of the Fifth Circuit’s new test for staffing company liability, it remains to be seen under what circumstances a staffing company “should have known” about a client’s discrimination or what “corrective measures” will be expected of them.

Background Freescale Semiconductor utilizes temporary workers employed by Manpower of Texas, a staffing company. Manpower hired and assigned Nicole Burton to work as one such “temp” employee beginning in 2009. She received generally positive-to-neutral performance reviews until 2011. In March 2011, she inhaled chemicals at work and eventually filed a workers’ compensation claim in June 2011. About two weeks later, Freescale decided to terminate her assignment after Burton was allegedly found using the Internet— an incident Freescale has since referred to as the “final straw.”

The Termination Decision The Fifth Circuit found there was conflicting evidence about whether Freescale found out about the Internet incident before or after making the termination decision. Although Freescale decided to terminate Burton’s assignment in late June, she was not actually terminated until late July (i.e., a month later). The delay apparently resulted from needing to hire and train her replacement. When the time to terminate Burton drew near, Manpower requested supporting documentation from Freescale.

Freescale passed the request to its supervisors, who began “generating retrospective documentation and (in contrast to previous practices) meticulously cataloging Burton’s every shortcoming.” On July 25, Manpower recommended against termination based on the “paltry documentation and the recency of Burton’s workers’ compensation claim.” But Freescale insisted. The next day, employees from Freescale and Manpower had a conference call to discuss Burton’s termination and to establish a “communication plan” moving forward. After the call, Manpower informed Burton that Freescale had decided to terminate her assignment for poor performance. Manpower simultaneously terminated Burton’s employment.

Burton Appeals the Dismissal of Her Case After her termination, Burton filed a claim with the Equal Employment Opportunity Commission and subsequently sued both Freescale and Manpower for discrimination in violation of the Americans with Disabilities Act (ADA). Freescale and Manpower moved for summary judgment. The district court granted summary judgment and dismissed the case. Burton appealed.

Freescale Liable as a “Joint Employer” The Fifth Circuit rejected Freescale’s argument that it was not Burton’s employer, finding that Freescale had supervised Burton, had a right to demand Burton’s termination from the assignment, and had actually insisted that Burton be terminated. Although Freescale argued that it did not handle payroll, withhold taxes, provide medical or workers’ compensation benefits, or set the terms and conditions of her employment, the court determined that Freescale’s right of control over Burton and the other Manpower temps to be the most significant factor. Nor did the court give much consideration to the staffing services agreement between Freescale and Manpower, which provided that only Manpower had the right to make hiring and firing decisions with respect to the workers assigned to work for Freescale but employed by Manpower. After finding Freescale was a joint employer, the court reinstated Burton’s ADA claim against Freescale, which had papered Burton’s employee file with examples of poor performance after it had made the termination decision.

Manpower Liable as a Joint Employer The Fifth Circuit also rejected Manpower’s argument that it was not liable because Freescale had made the actual decision to terminate Burton’s assignment and because the staffing services agreement required Manpower to terminate the plaintiff’s employment. The court determined that Manpower had “participated” with Freescale in “the creation and execution of a ‘communication plan’” regarding the termination decision, and was aware that Freescale had papered Burton’s employee file after the employment decision had been made to reflect additional examples of poor performance.

The court also stated that a “contractual obligation to fire an employee on a discriminatory basis [i.e., per the requirements of the Staffing Services Agreement] is no defense” because an employer has an “independent obligation to comply with the ADA, and a contractual obligation to discriminate would be unenforceable.”

Will Staffing Companies Always Be Liable for a Client’s Discrimination? It depends on how district courts interpret the Burton opinion. In a footnote, the Fifth Circuit stated that there are “a number of scenarios in which the joint-employer client’s unilateral action could violate the ADA but not trigger liability as to the staffing company.” Yet the court offered no additional guidance.

As a practical matter, staffing companies actually employ the temporary employees and maintain frequent contact with client companies for the duration of the staffing relationship. Thus, staffing companies find, recruit, and screen candidates based on certain criteria provided by the end client, and then present them to the client for consideration. If the client approves of the candidate, the staffing company hires the candidate, who typically is then assigned to work directly at the client’s work site. If the client does not approve of the candidate, the staffing company will not hire the candidate and will begin looking for alternate candidates to present to the client. After the assignment begins, the staffing company remains the employer of record and must comply with federal and state wage and hour, benefits, and other employment laws. If the client decides to end a leased employee’s assignment prematurely, it will inform the staffing company so the staffing company will know whether a new candidate is needed for the position or whether the staffing need no longer exists for the position. Throughout this process, staffing companies are keenly focused on maintaining a good business relationship with, and meeting the needs of, their clients.

So Can Staffing Companies Just Turn a Blind Eye? In theory, yes, but it is not recommended. On the one hand, staffing companies remain the employer of record for the duration of employees’ assignments and remain in constant contact with client companies. On the other hand, staffing services agreements themselves often give clients robust indemnity and insurance protections. A staffing company might escape a lawsuit filed by the employee under the Fifth Circuit’s test for liability by turning a blind eye to potential discrimination, but still might find itself contractually liable to the client under the indemnity or insurance protections often given to clients in staffing services agreements. If the staffing company is potentially liable either way, the most responsible business practice might be to proactively work with the client to attempt to address any potential discrimination, retaliation, or other employment issues. Doing so might help both companies avoid lawsuits filed by disgruntled former temp employees.

Three Primary Takeaways:

• Terminating an employee because his/her assignment with the client company ended is a legitimate, nondiscriminatory reason for terminating employment unless the staffing company knows or should have known that the client engaged in discrimination or retaliation and fails to take corrective action within its control.
• If the staffing company suspects that a client is terminating an employee’s assignment prematurely for potentially discriminatory or retaliatory reasons, the staffing company should be very careful about automatically proceeding with terminating the employee’s employment.
• If a client decides to end an employee’s assignment prematurely for discriminatory or retaliatory reasons, the staffing company should consider keeping the employee on payroll for at least one or two weeks to try to find the employee another assignment. However, no court would expect a staffing company to keep an employee on payroll indefinitely if there is no available project or work to which the employee could be assigned.

In sum, both client companies and staffing companies should be aware that each may be held liable for discrimination or retaliation by the other, notwithstanding the typical indemnification and insurance provisions contained in so many staffing services agreements. Wise staffing companies will carefully review—as compared to rubberstamp—such provisions, and will likewise review—not just rubber-stamp—termination decisions made by their clients.