Up-to-date information for employers on topics and issues that may affect workplace operations. The posts are current as of the date of the posting.


by Jennifer Brown Shaw and Geoffrey M. Hash | California Employer Update | Apr 1, 2010

Outsourcing is “in.” Employers increasingly rely on third parties for human resources tasks such as payroll, benefits and leave administration.

Some employers even outsource recruiting. Using vendors to handle these critical administrative tasks allows employers to take advantage of the vendors’ subject matter expertise and economies of scale. The employer may pay a premium for these services, but can focus on its core business.

Outsourcing Risks

Though an employer may be tempted to “subcontract it and forget it,” that’s not a wise approach. Using a third-party vendor may help reduce the risk of potential employment law claims because of the vendor’s expertise, liability insurance and contractual protections.

Reduced risk is not immunity, though. Employers may be liable for the actions of third parties they hire to administer human resources tasks, including recruiting.

For example, in Halpert v. Manhattan Apts., Inc., Manhattan retained an independent contractor to screen applicants for open positions. The independent contractor told Halpert he was “too old” for an open job, prompting Halpert to sue Manhattan for age discrimination.

The court decided it made no difference that an independent contractor made the comment, as opposed to Manhattan’s own employee.

The Age Discrimination in Employment Act applies “regardless of whether an employer uses its employees to interview applicants for open positions, or whether it uses intermediaries, such as independent contractors.”

Accordingly, the Court of Appeals sent the case back to the trial court to determine whether the independent contractor acted as Manhattan’s “agent.”

If it’s decided that the independent contractor was acting as Manhattan’s agent, Manhattan will be responsible for all of the damages, costs and fees that come with liability for age discrimination.

Although Halpert involved federal age discrimination law and a federal court of appeals on the East Coast, California decisions like Bureerong v. Uvawas, which addresses “joint employer” liability for employment decisions, demonstrate that the same standard applies in California, and beyond the age discrimination context.

If an employer gives a third party the authority to make recommendations, decisions or to act on its behalf concerning employees, then the employer may be liable for that third party’s misconduct.

This liability extends to a variety of situations, including harassment, discrimination, wage-and-hour violations or any other aspect of the employer-employee relationship.

Active Outsourcing

An employer should not “passively” outsource employee recruiting: that is, hire a third party to do its employee recruiting and then assume that outsourcing provides a layer of insulation from liability.

Employers should take an active role throughout the entire process, which breaks down into three distinct phases: the decision to outsource; forming the outsourcing relationship; and relationship maintenance.

Deciding to Outsource

Many agencies and individuals provide employers with outsourced recruiting assistance. Some focus on specific industries or skills. Others will help only with certain stages of the recruiting process (e.g., background checks), while still others are “full service.”

You want to avoid being mismatched with an agency that’s not set up to meet your specific needs at that time. You must invest time up-front to identify your recruiting needs.

Laying this proper foundation

involves addressing two basic questions:

  • Do you need assistance for the entire recruiting process or for only a portion?
  • Do you need help recruiting all employees, or only a specific subset (skill, industry or technology-specific employees, temporary or regular employees, etc.)?

After identifying your needs, it’s time to identify potential vendors. At this stage, look to your “tried and true” sources in your professional network. These may include fellow HR professionals, online resources and other vendors you currently work well with. People generally don’t refer other people or businesses that they haven’t already vetted themselves.

By mining your contacts, you’ll likely avoid another pitfall: establishing a relationship with an agency that hasn’t already proven itself. The next step is to minimize risk through further research on the agency’s operations:

  • Does it use employees or independent contractors in providing services to you?
  • Does it have internal policies reflecting your equal employment opportunity (EEO) values? Does it train its workers on best practices related to EEO and recruiting?
  • How does the agency source candidates (online versus traditional print media and other avenues)?
  • What type of records does the agency keep, and what are its retention policies and practices?

The answer to each question is revealing. If the agency uses contractors, it could have less control over how your recruiting is done, and less control could mean greater liability exposure for you.

Similarly, if it lacks internal policies and training programs that reflect your own EEO values, your risk for liability exposure again increases. Any lack in record-keeping and retention practices will create a problem if you face a lawsuit from an applicant or employee.

Look to the agency itself for this information. It should be able to answer each of the above questions by providing supporting materials and professional references.

Forming the Relationship

To minimize the potential for unmet expectations, disputes and legal liability, it’s critical to clearly establish what the agency is supposed to do. A written contract sets these expectations, and allocates responsibilities and risks.

A vendor agreement may include the following:

  • Scope of responsibilities;
  • Commitment to EEO;
  • Agency compliance with all applicable laws;
  • If you must meet diversity objectives associated with government programs, identify them and affirm the agency’s commitment to help you meet them;
  • The agency’s commitment to refrain from making statements regarding employment nature or length;
  • Requirement that the agency provide status reports, with specific instructions to the agency regarding the frequency and substance of such reports;
  • Record-keeping practices and retention policies;
  • Methods for resolving disputes;
  • Escalation and termination procedures to address problems or end the contract;
  • An indemnification clause (an agreement the agency will protect you) covering all claims arising out of the agency’s actions in providing services to you, regardless of the source of the claim (applicants for employment with you or the agency’s own employees/contractors) or nature of the claim (wage-and-hour, harassment, discrimination, etc.);
  • Insurance requirements;
  • Disclaimers regarding joint employment status;
  • Any guarantees related to hiring and recruiting; and
  • Fee structure and payment terms.

    Maintain the Relationship

    To further protect yourself from liability, you must maintain the relationship by ensuring compliance with the terms you established.

    Through the established reporting procedures, you can review data to ensure the agency is on track and meeting the terms and conditions of your agreement. Don’t abandon your common sense and intuition simply because you choose to partner with others on the recruiting process.

    Listen to what job candidates tell you about their experiences during the process, and be open to feedback about the agency, whether positive or negative.

    If anything causes you to suspect agency misconduct, you must investigate until the issue is resolved.

    Individual Consultants

    For employer liability purposes, it makes no difference whether the third party is a multi-employee agency or individual consultant. You should consider several factors if you use an individual consultant.

    For example, a consultant could be deemed an employee rather than an independent contractor by the California Employment Development Department, the California Franchise Tax Board and/or the Internal Revenue Service if the consultant doesn’t meet the requirements for establishing independent contractor status.

    Those requirements include factors such as operating an independent business or bearing sole responsibility for the manner and method of providing the services.

    If a contractor is deemed to be an employee, the contractor will be entitled to all of the rights and benefits of the employer-employee relationship. Also, individuals may not be insured, and may not have resources needed to defend against potential claims.

    The bottom line? It’s important to ensure individual consultants are properly classified and your business is adequately protected from potential lawsuits from the consultant.

    If handled properly, outsourcing the hiring process can help employers find the best talent available in the most efficient manner.

    If handled improperly, though, an employer could find itself in court.