January 6, 2011

Employment Law Advisory for 1/6/11

Use of a Payroll Company Does Not Relieve Business of Obligations as an Employer

Many businesses retain so-called “payroll companies” to assume responsibility for processing their payroll and managing other human resources functions.  In some situations, businesses utilizing payroll companies believe that doing so relieves them of the duties and liabilities of an employer, including liability for violations of wage and hour laws.  A recent court decision confirms that businesses cannot avoid responsibility for complying with wage and hour laws by hiring payroll companies to process their payroll for them. 

In Futrell v. Payday California, Inc., a producer of television commercials retained a payroll company to manage its payroll operations and serve as the official employer of the people who worked for it.  An employee later alleged that he had not been paid properly for work he performed and sued both the payroll company and the business that hired it.  The trial court dismissed the suit against the payroll company on the ground that it was not the plaintiff’s employer, notwithstanding the contract provisions purporting to an employment relationship solely between the worker and the payroll company, and the appellate court affirmed the dismissal. 

In its ruling, the appellate court emphasized three questions in seeking to identify Futrell’s true employer.  First, the court sought to identify the party that controlled Futrell’s wages, hours and working conditions.  Second, the court sought to identify the party that either caused Futrell to work or could have prevented him from doing so.  Finally, the court examined a variety of factors (including the persons who supervised Futrell, those who provided him with the tools and equipment he used at work, and those who benefit most directly from his work) to identify the party considered to be Futrell’s employer under common law.  In each instance, the court concluded that the company producing the television commercials, rather than the payroll company, represented Futrell’s true employer. 

The Futrell decision highlights the fact that documents which identify a payroll company as an individual’s employer are not necessarily controlling, and that courts will scrutinize the facts and circumstances surrounding a work relationship to identify the party subject to the obligations of an employer.  The decision sends clear messages to both businesses that utilize payroll companies and to payroll companies themselves. 

Organizations that utilize payroll companies should be diligent in assuring that workers are paid and treated in accordance with applicable law, since contracts identifying a payroll company as the employer of a worker are unlikely to be respected by courts if the hiring business exercises substantial control over the worker.  If a business wishes to shift responsibility for violations of law to a payroll company, it must assure that its contract contains carefully drafted indemnity provisions, and that the payroll company possesses resources sufficient to satisfy any foreseeable indemnity obligation.  Payroll companies, on the other hand, should carefully consider whether they want to assume indemnity obligations that expose them to the risks faced by an employer, particularly where they lack the ability to control the workplace and minimize those risks. 

The Futrell decision poses important questions for business that utilize payroll companies and for the payroll companies themselves.  If you have any questions regarding the use of payroll companies or any other employment law issues, we invite you to contact one of our attorneys

Daniel F. Pyne III          DPyne@hopkinscarley.com
Richard M. Noack        RNoack@hopkinscarley.com
Ernest M. Malaspina   EMalaspina@hopkinscarley.com
Karen Reinhold           KReinhold@hopkinscarley.com
Erik P. Khoobyarian    EKhoobyarian@hopkinscarley.com
Shirley Jackson           SJackson@hopkinscarley.com

Please recognize that this Advisory is intended to serve only as a general overview of certain issues and should not be used as a substitute for legal advice tailored to a specific factual scenario.