Bloomberg Law
Nov. 2, 2021, 8:00 AM

Tesla Verdict: A Wake-Up Call for Companies Using Contract Labor

Jonathan LaCour
Jonathan LaCour
Employees First Labor Law

When a California jury returned a record-setting verdict against Tesla for racial discrimination on Oct. 4, it sent a shock wave across the business world, but especially among the ranks of companies that regularly use contract workers.

The $137 million judgment, which will be closer to $180 million with interest, is likely to be appealed and could be reduced, but the damage to Tesla and other companies with contracted workforces is nonetheless substantial.

The Black elevator operator who faced repeated racist treatment, including frequent use of the n-word, was employed by a third-party staffing agency. The workers who subjected him to ongoing disparagement were also paid by another company. Most workers at Tesla’s Fremont plant, where the incidents occurred, were supplied through an independent company.

Yet it will be Tesla, not the staffing agency, that will write the huge check when all appeals are over, and the dust has settled. Because it controlled the workers and directed their work on its site, Tesla was a joint employer, along with the agency, and is jointly and severally liable for the verdict amount.

Companies that employ large external workforces must now start doing some serious self-examination. What does the Tesla verdict mean for them? Can they evade liability by distancing themselves from workers who aren’t on their payrolls?

The Tesla verdict says that companies that hire temporary workers hoping to terminate them or escape responsibility when they suffer injuries or make complaints will be held accountable, even if the contract with the third-party employer purports to assign all liability to that agency.

No Escape From Liability in Using Outside Contractors

There are no doubt good reason—taxes, economics, flexibility—for using an outside workforce, but avoiding discrimination and harassment lawsuits in the workplace is not one of them, at least in California. Tesla, which calls the Golden State its headquarters but has plans to move, has already settled at least one discrimination claim and faces a number of other such lawsuits.

These could be just the tip of the racial discrimination iceberg. Since the pandemic summer of Black Lives Matter, there has been a heightened awareness of workplace inequities and it is likely that there will be a concomitant increase in race-related employment cases. Companies that utilize outsourced workforces would do well to review the applicable laws on joint employment.

Pursuant to DOL rules that went into effect Sept. 28, vertical joint employment exists under the Fair Labor Standards Act where “an employee has an employment relationship with one employer (typically a staffing agency, subcontractor, labor provider, or other intermediary employer),” another employer is “receiving the benefit of the employee’s labor,” and “the economic realities show that the employee is economically dependent on, and thus employed by,” the other employer.

California law defines “employee” as “[a]ny individual under the direction and control of an employer under any appointment or contract of hire or apprenticeship, express or implied, oral or written.” If a worker can demonstrate that the contracting company—in this case, Tesla—exercised direction and control over the worker, the common-law “keystone of the employment relationship,” an employment relationship is established.

This can be shown by, among other factors, whether the employee must obey employer instructions, and whether “there was a right to terminate the service at any time.”

Texas case law, which will govern Tesla after its planned relocation to Austin, holds that “the test for determining whether a person is the employee of the original employer or of the borrowing employer is whether the employee is subject to the specific direction and control of the loaning or the borrowing employer.”

PEOs’ Insurance May Not Cover Punitive Damages

Professional Employer Organizations (PEOs), which include staffing agencies ADP TotalSource and TriNet, generally identify themselves as joint employers, along with the job site or hiring employer. PEOs may maintain insurance coverage for both themselves and those companies, but such policies may not cover a punitive damages claim, especially one as high as in the Tesla case. Under the doctrine of joint and several liability, the hiring company could foot the entire bill for an outsize award.

It is noteworthy that $130 million of the Tesla judgment was punitive damages. The bad actors were not just fellow workers; there was malice, oppression, or fraud by a Tesla “managing agent,” a senior executive with sufficient opportunity to stop the harassment who failed to do so. The staffing agency, even had it been apprised of the violations, had little ability to witness or stop ongoing harassment.

Train and Treat Hired Staff as Employees

In a posting titled “Best Practices for Temporary Staffing Firms and Professional Employer Organizations,” the Texas Workforce Commission offers PEOs these tips, among others, for protecting the hiring company:

  • Reserve the right in the client service agreement to exercise as many of the prerogatives of an employer, at least on paper, as possible, i.e., hiring, firing, reassignment, training, pay, benefits, and so on.
  • Have employees fill out employment applications.
  • Give them company policy handbooks.
  • Have them sign clear acknowledgement of receipt forms listing the temporary help firm or the PEO as the employer.
  • Give reminders of who the employer is throughout the employment relationship and at the conclusion of the assignment.

What the Tesla verdict tells us is that these guidelines are merely words on paper. The company for whom work is performed is ultimately in the driver’s seat. It has an obligation to police workers, to train them in acceptable behavior, and to put a stop to activities that would be against the company’s policies if done by employees.

The bottom line is that in most cases, staffing agency workers are also company employees.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Write for Us: Author Guidelines

Author Information

Jonathan LaCour is the founder and managing attorney of Employees First Labor Law. He represents plaintiffs in labor law matters, handling claims for wrongful termination, sexual harassment, unpaid overtime, and unpaid wages, FMLA violations, and workplace discrimination.