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When contracting with temp or payroll services, make sure it’s clear who the real employer is

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in Employment Law,Human Resources,Small Business Tax,Small Business Tax Deduction Strategies

Sometimes, it’s possible for an employee to have two employers. That’s often the case when a temporary service provides workers for a client, and both the temp company and the client exercise significant control over how and when the work is performed.

But now there’s a new wrinkle. The Court of Appeal of California has refused to extend this joint-employer concept to a company that handled the details of payroll and workers’ compensation insurance and listed itself as the employer on tax filings and other government forms.

Recent case: John Futrell’s work involves providing freelance security services during the production of television commercials. In 2002, Reactor Films, a production company, engaged Futrell and other temporary workers to work on its commercials. Reactor outsourced the payroll and insurance functions to a company called Payday California.

Payday listed itself as the employer on paystubs, tax filings and other government forms. It also procured workers’ compensation insurance for the temps Reactor hired, identifying itself in the applications as the employer.

Futrell worked security for several commercials Reactor was filming, including ads for J.C. Penney and Pizza Hut. Futrell got his paychecks from Payday.

In 2006, Futrell sued Payday, alleging he had not been paid the appropriate overtime wages under California law. He sought class-action status, representing all other security personnel who had worked on the J.C. Penney and Pizza Hut shoots.

Futrell said he had worked 14 hours in one day on the first commercial and 16.5 hours on the second, but claimed he had only been paid time-and-a-half for the hours over eight worked on each commercial. He claimed Payday was his employer and that California law dictates that employees who work more than 12 hours at a time must be paid two times their base rate.

Payday countered that it wasn’t actually Futrell’s employer.

The Court of Appeal of California agreed. It concluded that companies that simply outsource payroll and related functions without actually controlling any significant aspect of the employment relationship can’t saddle the payroll company with employer liability.

That’s true even if the payroll company lists itself as the employer on tax records and paystubs or while procuring workers’ compensation insurance on behalf of the true employer. (Futrell v. Payday California, No. B215110, Court of Appeal of California, 2010)

Final notes: This case involved the underpayment of less than $150 per commercial and total employment that lasted fewer than 40 hours total. Still, the underpayment spawned litigation that could potentially have cost Payday California hundreds of thousands of dollars, since it provided payroll services for many workers over a long period of time.

California has some of the strictest overtime laws in the nation. It’s easy for a company to unwittingly become a joint employer if it assumes too many duties and responsibilities on behalf of its client.

Even though Payday won on appeal, it had to expend thousands of dollars in legal fees and endure hundreds of hours of depositions.

Before assuming significant responsibilities, make sure you check with your attorney, who can draft a contract that protects you from potential liability.

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