Your Company Could Be Liable To Non-Employees

In each of these scenarios, an understandable first reaction might be: “We can’t have any liability. The person complaining is not even our employee.”

In fact, as a number of recent cases illustrate, there is no such safe harbor. A company’s dealings even with non-employees can lead to “employment” law liability in several different ways.

First, contrary to widespread belief, not all statutes that address discrimination in the workplace are limited to discrimination against employees. For example, Section 4(4A) of Massachusetts General Laws, Chapter 151B (Massachusetts’ fair employment practices statute) makes it unlawful “for any person to coerce, intimidate, threaten, or interfere with another person in the exercise or enjoyment of any right granted or protected by this chapter”) (Emphasis added.)

In a recent case before the Massachusetts Commission Against Discrimination (MCAD), a hearing officer found a construction company liable under Chapter 151B for its supervisor’s racial harassment of another worker at a job site, even though the victim was not the construction company’s employee.

Through the actions of its supervisor, the MCAD hearing officer ruled, the construction company interfered with the complainant’s right to be free from racial harassment in his place of work. See Aldridge v. Thomas O’Connor Constructors, Inc., 26 M.D.L.R. 124 (May 7, 2004).

Similarly, an often-overlooked federal statute prohibits race discrimination (though not other forms of discrimination) in “the making performance, modification and termination of contracts, and the enjoyment of all benefits, privileges, terms, and conditions of the contractual relationship.” 42 U.S.C. §1981(b).

As no less formidable a defendant than Wal-Mart Stores, Inc. discovered, the statute is not limited to the employment relationship. When a federal jury found that Wal-Mart employees directed racist statements and a white-supremacist sign toward the Mexican-American owner of a maintenance company with which Wal-Mart had a contract, the 1st U.S. Circuit Court of Appeals affirmed a $300,000 judgment against Wal-Mart.

Under Section 1981, the 1st Circuit held, a defendant can be liable even to an independent contractor for creating a racially hostile work environment. Danco, Inc. v. Wal-Mart Stores, Inc., 178 F.3d 8 (1st Cir. 1999).

Even under statutes that protect employees only, the definition of “employee” can cover many more workers than some employers realize.

For example, under the joint employer doctrine, workers who are employed and paid by temporary agencies or professional employer organizations may be considered employees of both the agencies and of the businesses for which they perform services.

Likewise, many workers who are treated as independent contractors would nevertheless be considered employees for purposes of anti-discrimination, workers compensation, unemployment, and wage and hour laws.

Most alarmingly to some, a U.S. District Court decision earlier this year suggests that, under certain not uncommon circumstances, employees of a subsidiary could be considered employees of the parent corporation for purposes of the WARN Act, COBRA, and other employment-related statutes. See Sigmon v. Recovery Equity Investors, L.P., 306 B.R. 523 (W.D.N.C. 2004).

Avoiding Liability

To protect against hidden liability to non-employees (or persons not usually considered employees), businesses should take several steps.

First, companies should take seriously and investigate carefully any and all allegation of discrimination or harassment by company employees, even if the person who claims to be the victim is not their employee.

Under Massachusetts law, a business could face liability if its employees force anyone – a customer, independent contractor, temporary worker, supplier, vendor or anyone else – to endure severe and pervasive harassment on the basis of race, sex, age, disability, sexual orientation or religion in order to do his or her work. In race discrimination cases, 42 U.S.C. §1981 could also impose liability.

Second, employers should train their employees to avoid harassment of anyone with whom they come in contact on the job – fellow employee or not. Even if there were no legal risks, most companies would want to prevent employees from harassing or discriminatory conduct toward third parties in order to protect the company’s reputation in the eyes of the public and its own workforce. A short training session emphasizing that harassing others jeopardizes an employee’s job, and even his or her personal assets, can prevent many such situations from arising in the first place.

Third, employers should review critically whether workers are truly employees or independent contractors. The Internal Revenue Service has one set of factors for determining whether a worker is an employee or an independent contractor, the U.S. Department of Labor has another, and courts may use variations of these tests to define “employee” under different state and federal statutes.

Unfortunately, none of these tests is easy to apply. See Richard R. Carlson, “Why the Law Still Can’t Tell an Employee When It Sees One and How It Ought to Stop Trying,”22 Berkeley J. Emp. & Lab. L. 295 (2001). But experienced counsel can estimate at least roughly the risk that a worker would be considered an employee under particular statutes or for particular purposes.

Fourth, businesses should review their insurance coverage to confirm that it covers workplace claims by workers who it does not consider its employees. Such claims might be covered under commercial general liability insurance, employment practices liability insurance, or even directors’ and officers’ coverage. Employers should ensure that such claims do not fall between the cracks between the different types of policies.

Fifth, employers should seek contractual protection against liability arising out of their dealings with temporary employees, employees of business partners with whom they will work closely, or independent contractors. If a company does not think it should be responsible for any such liabilities, it may be able to obtain language requiring another more appropriately responsible party to provide indemnification.

The known risks of liability to employees are daunting enough. By following these steps, businesses can protect themselves against the unpleasant surprise of “employment” law liability to non-employees.

Patrick Bannon is a partner in the law firm of Gadsby Hannah LLP, where he practices in the areas of employment and litigation. He also serves as contributing editor of “Tortious Interference in the Employment Context: A State-by-State Survey,” just published by ABA/BNA Books. Bannon can be reached at [email protected].