May 1998

Temporary/Leased Employees

Can They Solve Your Temporary Crisis?

by David T. Barton and C. Christine Burns

Temporary or leased employees now make up four percent of the Arizona workforce.1 For the past several years, temporary employment, the growth industry of the 1990s, has far outstripped traditional or "permanent" employment.2 In fact, Arizona’s largest employer industry is currently the personnel supply industry, employing more than twice as many individuals as the state’s second-largest employer industry, state government.3

For lawyers and law firms, temporary or leased employees (including temporary lawyers) may fulfill a variety of important functions. However, in addition to the concerns that are always present with the use of temporary employees, there are some caveats that are unique to law firms. This article discusses legal issues involving temporary and leased employees, the advantages and disadvantages of using temporary legal employees, the concerns unique to law firms, and suggestions on how to minimize the risks created by temporary or leased employees.


The term "temporary" or "leased employee" has been applied to a number of employer/employee relationships including temporary employees, leased employees, loaned employees, part-time employees, seasonal employees, independent contractors, self-employed workers and casual employees. This article will focus on employees who are hired and paid by one party and who work for another. This group includes leased employees, loaned employees and temporary employees.4 For purposes of this article, the entity that supplies employees to the workforce will be known as the "supplier employer," the entity for whom the work is performed will be identified as the "customer employer," and the worker will be referred to as the "temporary employee."

Although each supplier employer will have its own individual contract, the typical temporary employee contract places the burden of withholding and payroll taxes, workers’ compensation insurance, unemployment insurance and employee benefits on the supplier rather than the customer employer. Additionally, the supplier employer may be contractually responsible for complying with all laws regarding recruiting, interviewing, testing, hiring, disciplining and terminating employees. Typically, the customer employer will be responsible for protecting its intellectual property rights and its confidential and proprietary information.

Legal Background

The primary concern for customer employers is liability. There are several state and federal statutes, as well as common law theories, that can create liability if an employer/employee relationship is formed. The key question in determining liability is whether the customer or the supplier is the "employer" of the temporary employee. Although the law is unsettled on this issue, courts generally apply common law tests to determine whether the supplier employer, customer employer or both are "employers" under the various employment laws.5 These tests are generally the same tests used to determine independent contractor status6 and the focal point of these tests is control.7 The trend, it appears, is to find that the customer employer and the supplier employer are joint employers.

The customer and supplier both may be considered employers under the Arizona Workers’ Compensation Act.8 The Arizona Court of Appeals has held that the exclusive remedy provision of the Act barred a temporary employee from suing a customer employer.9 Indeed, Arizona courts also have held that the customer employer can be exclusively responsible for maintaining workers’ compensation coverage for temporary employees.10

Under the Fair Labor Standards Act (FLSA),11 the Department of Labor often seeks to find both the supplier employer and the customer employer jointly liable for complying with the FLSA’s minimum wage, overtime, equal pay, child labor and recordkeeping requirements.12 This is because the FLSA broadly defines "employer" as "any person acting directly or indirectly in the interest of an employer in relation to an employee."13 The Department of Labor has codified its joint employer doctrine at 29 C.F.R. §791.2.

Under the National Labor Relations Act, the trend also has been to find joint employer status between the customer and supplier employers.14 There are, however, exceptions in cases where the customer employer does not provide daily supervision of temporary employees.15 The National Labor Relations Board also takes the position that truly temporary employees, or employees of a joint employer, should not normally be included in the same bargaining unit as the customer’s "permanent" employees, or employees of a single employer.16

Customer employers often believe that because they do not hire, fire, or directly pay temporary employees, they have no equal employment opportunity obligations toward those workers. However, new guidelines issued by the EEOC make it clear that both the supplier and customer employers may be liable for discrimination as to temporary employees.17 Thus, both the supplier and the customer employer should comply with federal anti-discrimination statutes, such as Title VII of the 1964 Civil Rights Act, the Americans with Disabilities Act, and the Age Discrimination in Employment Act.

Arizona courts also have held customer employers liable for discrimination under the Arizona Civil Rights Act.18 Supplier employers also should remember they have an extra obligation to ensure that they do not supply employees to customers that routinely engage in discrimination against temporary employees.19

The Internal Revenue Code (IRC) defines "employer" as the "person for whom an individual performs or performed any service"20 unless that person does not have control of the payment of wages, in which case the "person having control of the payment of...wages" is the "employer."21 Using this definition, the IRS has taken the position that both the supplier employer and the customer employer may be considered the "employer" for payroll tax purposes. Recent decisions indicate that if the supplier employer defaults on its payroll tax or withholding obligations, the customer employer may be liable for those obligations concerning its temporary workforce. This is true even if the customer employer has remitted the taxes to the supplier employer for payment to the IRS.22

The Federal Insurance Contributors Act (FICA) and Federal Unemployment Tax Act (FUTA) define employee as "any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee..."23 Thus, both the customer and the supplier employer could be liable for FICA and FUTA taxes if they exercise sufficient control over the temporary employee.24

Although no employer is legally required to provide benefit plans to its employees, the Employer Retirement Income Security Act of 1974 (ERISA) governs employee benefit plans if they exist. A recent case from the 9th Circuit demonstrates why plan administrators should be careful about denying ERISA benefits to temporary employees. If a qualified benefit plan provides benefits to all "employees," temporary employees could be eligible to participate in the plan if their relationship with the customer employer satisfies the common law test for an employer-employee relationship.25 This is true even if the agreement between the employee and employer provides that no employer-employee relationship is intended or created.26

The Immigration Reform and Control Act places the burden of verifying an employee’s eligibility for employment upon the supplier employer. Thus, customer employers generally do not have an obligation to verify the employment status of their temporary employees unless the customer employer knows the employee is not eligible to be employed in the United States.27

In short, for purposes of workers’ compensation, wage and hour, union organizing, anti-discrimination, and tax laws, there are instances where both the supplier and the customer employer will be jointly liable for employment obligations. However, for immigration purposes, the supplier employer likely will not have any liability.

Temporary Employees in the Legal Profession

The growth of temporary employees in the workforce at large has been mirrored by similar growth in the legal profession. Lawyers and law firms are increasingly turning to temporary staff for support services and to supply needed expertise. The demand is not only for secretarial, clerical and paralegal support, but temporary attorney services as well.28

Temporary employees provide several significant advantages to the legal profession. For instance, temporary employees may be more flexible in the assignments and work hours they are willing to accept. Temporary employees also understand that the work project or assignment is "temporary", and in many instances they do not want long-term or permanent employment. Temporary employees also may bring a degree of experience or expertise to the customer employer that cannot easily be obtained in the general workforce. For these reasons, if large volumes of documents must be reviewed, or if a case involving a particular specialty comes into the office, a law firm may turn to temporary staffing agencies to meet the particular needs of a client without having to hire permanent employees.

Anecdotal evidence suggests that cost savings may be the biggest reason for hiring temporary legal help. Not only does a temporary attorney come without the usual expenses associated with recruitment, but the hourly rate for temporary legal help is often much less than market rate. Temporary attorneys can often be obtained for $40 to $90 per hour. Engaging outside counsel is much more expensive. When existing legal staff is temporarily overworked, temporary attorneys may be the most economical solution.

Temporary legal staff also provide tax savings. A typical contract between a supplier employer and a customer employer places the burden of withholding and payroll taxes, workers’ compensation insurance, unemployment insurance, and employee benefits on the supplier employer. Not only does this directly alleviate administrative costs, but it can actually save the customer employer money by not having to make FICA contributions and not having to pay policy dues for workers’ compensation.

Temporary lawyers also come with a unique blend of problems. The most obvious are the potential conflicts that can arise when a contract or temporary attorney works for several different law firms. Reputable suppliers of temporary legal staff may perform conflict checks, but it would be good practice for any customer employer to inquire concerning the temporary lawyer’s former places of employment and any matters on which he or she may have worked. Other proactive measures should also be taken to prevent conflicts and protect confidentiality. The State Bar of Arizona Committee on Rules of Professional Conduct recently opined that a temporary attorney should be considered a "full associate" of each employing firm for conflicts and confidentiality purposes unless: (1) there is an agreement that clearly limits the scope of the attorney’s work to specific projects or clients; and (2) appropriate screening devices are put in place to prevent the temporary attorney from having access to all of the firm’s files.29

There has been some controversy over the question of whether the collection of wages for a temporary attorney by a supplier employer creates a fee splitting problem, prohibited by the ethical rules. This issue has largely been resolved by the American Bar Association’s Committee on Ethics, which opined that such a practice is not prohibited by the Rules.30

A troubling issue regarding the employment of temporary legal staff is confidentiality. Although lawyers are bound by the rules of ethics to keep matters strictly confidential, legal staff are under no similar ethical obligation. For this reason, it is quite possible that a temporary paralegal or legal secretary who does work for a number of law firms in a community could pass around confidential information. This difficult situation can be remedied to some degree by confidentiality agreements and/or by policies and procedures implemented by reputable supplier employers.

The specter of malpractice litigation also may inhibit temporary employment of legal staff. Most loss prevention policies cover only the firm and its regular employees. Temporary employees are generally not covered. This is problematic not only for the temporary employee, but also for the client who may suffer a loss. The question of insurance is one that should be discussed thoroughly with the supplier employer, the temporary employee, the customer employer’s carrier and the client before the temporary employee begins work. There should be a clear written under-standing of who will be responsible in the event of a malpractice lawsuit.

Finally, law firms or lawyers employing temporary staff should consider consulting with clients regarding any proposed temporary staffing solution. Professor Monroe Freedman of Hofstra University has stated his belief that ethical problems arise if a law firm tries to pass off the work of a temporary employee as that of a regular associate, pocketing the savings. Says Professor Friedman: "The client is entitled to know that there is somebody working on their matter who, for whatever reason, the law firm isn’t willing to hire on a permanent basis."31 The ABA Committee on Ethics agrees and has opined that "where a temporary lawyer is performing independent work for a client without close supervision of a lawyer associated with the law firm, the client must be advised of the fact that a temporary lawyer will work on the client’s matter and the consent of the client must be obtained."32


The single most important factor in obtaining qualified temporary employees is a reputable supplier employer. Customer employers should remember that they will be joint employers with any supplier employer for the purposes of many employment-related laws. For this reason, if temporary employees are desired, the customer employer should exercise all due care in selecting a supplier employer partner.

A clear and comprehensive agreement between the supplier and the customer employer is also critical to success. This agreement should discuss not only the respective responsibilities of both parties, but also the issue of insurance that will protect both parties and the client against any loss created by the temporary employee.

Both the customer and the supplier employer should assume responsibility for temporary employees. Both should remember that anti-discrimination, wage and hour, and workers’ compensation laws may apply. To that end, temporary employees should not be treated any less favorably than an employer’s regular workforce.


Temporary employees can be a significant benefit to overworked or under-specialized lawyers or law firms. The growth of this segment of the workforce suggests that temporary employees can be of great value to law firms. However, a temporary employee can also bring significant liability both to the supplier and the customer employer. For this reason, employers should not assume that temporary employees can be hired and fired without proper consideration. This is particularly true in the legal profession where temporary employees create a substantial risk of having conflicts of interest, confidentiality and insurance problems.

David T. Barton and C. Christine Burns are associates in the Phoenix office of Quarles & Brady.

Mr. Barton’s practice focuses on employment law issues related to defending employers from wrongful termination and discrimination claims. Ms. Burns’ practice is concentrated in the fields of employment law and commercial litigation, with a particular emphasis in the defense of employment discrimination, common law wrongful discharge suits, EEOC and ACRD charges and products liability.


1. Statistics for the Second Quarter of 1997 obtained from Arizona Department of Economic Security, Research Administration.
2. Robert L. Rose, A Special News Report About Life on the Job and Trends Taking Shape There, Wall St. J., April 11, 1995.
3. Arizona Department of Economic Security, Supra.
4. Independent contractors, self employed, part-time, seasonal and casual employees are not included here because those employees have a direct relationship with the employer.
5. See, e.g., Nationwide Mot. Ins. Co. v. Darden, 503 U.S. 318 322 (1992) (holding that Congress’ use of the word "employer" means the established common law meaning "unless the statute otherwise dictates"); Professional & Executive Leasing, Inc. v. Commissioner, 89 T.C. 225, 231 (1987) (applying common law principles to determine relationship under the Internal Revenue Code); Vizcaino v. Microsoft Corp., 120 F.3d 1006, 1008 (9th Cir. 1997) (applying common law test to determine ERISA eligibility).
6. See, Bartels v. Birmingham, 332 U.S. 126, 132 (1947). The IRS has developed a list of 20 factors to test for independent contractors status. Rev. Rul. 87-41; see also 26 C.F.R. § 31.3401(c)-1(b). Although no single factor is determinative, and no list of factors exclusive, the following factors are regularly applied: (1) the degree of control exercised over the details of the work; (2) supply of tools, facilities, or equipment; (3) opportunity for profit or loss; (4) whether the work is part of the principal’s core business; (5) rights to discharge; (6) the parties agreement or intent. See United States v. Silk, 331 U.S. 704, 716 (1947).
7. See, Restatement (Second) of Agency § 220 (1958).
8. A.R.S. §§ 23-901 to 1091; See Nation v. Weiner, 145 Ariz. 414, 701 P.2d 1222 (Ct. App. 1985). (Temporary personnel agency and hospital where employee had worked for two years were both deemed employers.)
9. Araiza v. U.S. West Business Resources, Inc., 183 Ariz. 448, 904 P.2d 1272 (Ct. App. 1995).
10. See Labor Force v. Industrial Com’n. of Arizona, 184 Ariz. 547, 583, 911 P.2d 553, 559 (Ct. App. 1995).
11. 29 U.S.C. §201 et seq.
12. The Department of Labor has assigned primary, though not exclusive, responsibility for recordkeeping functions to the supplier employer. See Department of Labor Opinion Letter #874 (October 1, 1968).
13. 29 U.S.C. §203(d).
14. N.L.R.B. v. Browning-Ferris Industries of Pennsylvania, Inc., 691 F.2d 1117, 1124 (3d Cir. 1982); Bookdale Hosp. Medical Center & Member of League of Voluntary Hosp. And Homes of N.Y., 313 NLRB No. 74 (1993); Flatbush Manor Care Center, 313 NLRB No. 73 (1993).
15. See, e.g., Laerico Transp. & Warehouse, 269 NLRB No. 61 (1984).
16. Bookdale Hosp. Medical Center and Member of League of Voluntary Hosp. and Homes of N.Y., 313 NLRB No. 74 (1993); Flatbush Manor Care Center, 313 NLRB No. 73 (1993).
17. See EEOC Policy Guidance on Contingent Workers Issued December 9, 1997.
18. Broomfield v. Lundell, 159 Ariz. 349, 767 P.2d 697 (Ct. App. 1988).
19. See EEOC Policy Guidance, supra.
20. 26 U.S.C. § 3401(d).
21. 26 U.S.C. § 3401(d)(1).
22. See Earthmovers, Inc. v. United States, 199 B.R. 62, 67 (M.D. Fla. 1996); United States v. Garami, 184 B.R. 834, 838 (M.D. Fla. 1995). For a contrary view in a slightly different employment situation, see Otte v. United States, 419 U.S. 43, (1974) and Southwest Restaurant Systems, Inc. v. I.R.S., 607 F.2d 1237 (9th Cir. 1979).
23. 26 U.S.C. § 3121(d)(2).
24. See, Shore Fish Co. v. U.S., 330 F.2d 961 (Ct. Cl. 1964).
25. See, Vizcaino v. Microsoft Corporation, 120 F.3d 1006, 1014 (1997).
26. Id. at 1010.
27. See 8 C.F.R. §274(a)(2)(A).
28. Telephone interview with Patsy Bakunin, President of Co-Counsel®, in Phoenix, AZ. (Jan. 5, 1998). (Ms. Bakunin reports that the demand for temporary attorneys has more than doubled in the past five years with approximately 200 temporary attorneys now covering temporary demands in the Phoenix area.)
29. See Opinion No. 97-09, State Bar of Arizona, December 1, 1997.
30. See Formal Opinion 88-356, American Bar Association, December 16, 1988 at p. 12.
31. Amy Stevens, Big Companies Hire More Lawyers — Temps, Wall St. J., September 23, 1994.
32. American Bar Association, supra, p. 10.