Co-employment lawsuits happen when two companies share enough control over the same worker that both can be held legally responsible for how that worker is treated. The recurring examples fall into five buckets: misclassification of workers denied benefits, unpaid wages under the Fair Labor Standards Act, discrimination and harassment claims against staffing-agency clients, workplace safety citations, and tax liability for treating employees as contractors. In each of these categories, courts and agencies look past the paperwork to who actually directed the work, and both companies can end up paying.
Misclassified Workers Denied Benefits: Vizcaino v. Microsoft
The most widely cited co-employment case began with thousands of temporary workers at Microsoft who did the same work as regular employees but were labeled independent contractors or agency temps. These workers shared supervisors with full-time staff, worked the same hours, used company equipment, and carried building access cards. Microsoft excluded them from its stock purchase plan and retirement benefits.1FindLaw. Vizcaino v. Microsoft Corporation
The Ninth Circuit ruled that Microsoft’s degree of control made them common-law employees regardless of what their contracts said. Under the IRS common-law test, a worker is your employee if you have the right to control what work gets done and how it gets done, even if you give the worker some freedom in practice.2Internal Revenue Service. Employee (Common-Law Employee) Because Microsoft dictated tasks, schedules, and tools, the label on the paychecks did not insulate the company.
The case ultimately settled for roughly $96.9 million to compensate workers for lost stock purchase and retirement benefits.3Justia Law. Vizcaino v. Microsoft Corp., 142 F. Supp. 2d 1299 (W.D. Wash. 2001) For any company using large numbers of temps or contractors, the lesson holds: integrating workers into your operations and controlling their day-to-day activities can pull them onto your books no matter what the staffing contract says.
Unpaid Wages Under the FLSA: Zheng v. Liberty Apparel
Wage-and-hour disputes are the most common co-employment claims. Joint employers are jointly and severally liable under the FLSA, so a worker can collect the full amount owed from either company or both combined.4U.S. Department of Labor. NPRM: Joint Employer Status Under the FLSA, FMLA, and MSPA If the subcontractor goes bankrupt, the primary contractor still owes the entire judgment.
In Zheng v. Liberty Apparel Co., garment workers were officially employed by a subcontractor but spent their days on Liberty Apparel’s factory floor, using Liberty’s equipment, performing work integral to Liberty’s production. The Second Circuit held that these facts could make Liberty a joint employer, pointing to factors including use of the alleged employer’s premises and equipment, whether the work was integral to production, and how closely the company supervised day-to-day tasks.5FindLaw. Zheng v. Liberty Apparel Co., 355 F.3d 61 (2d Cir. 2003) Ordinary quality oversight of a contractor’s work does not by itself create joint employment, but controlling schedules, dictating how tasks are performed, and shuffling workers between assignments does.
What Workers Can Recover
An FLSA winner recovers the unpaid wages plus an equal amount in liquidated damages, effectively doubling the back pay, and the court awards attorney’s fees and costs on top.6Office of the Law Revision Counsel. 29 USC 216 – Penalties For a company with dozens or hundreds of affected workers, the totals climb fast.
The filing window is two years from each violation, extended to three years if the violation was willful, meaning the company knew it was breaking the law or recklessly disregarded the requirements.7Office of the Law Revision Counsel. 29 USC 255 – Statute of Limitations In co-employment situations, the willfulness question often turns on whether the client company knew, or should have known, that workers were not being paid correctly.
Discrimination and Harassment Claims
Title VII of the Civil Rights Act bars employment discrimination based on race, color, religion, sex, and national origin.8U.S. Equal Employment Opportunity Commission. Title VII of the Civil Rights Act of 1964 These protections extend to temporary and outsourced workers. The real question in co-employment cases is who pays when things go wrong.
The EEOC’s position: if both a staffing firm and its client have the right to control a worker, and each meets the minimum employee threshold, they are joint employers for discrimination purposes. The client must treat assigned workers the same as its own employees, and the staffing firm must take corrective action within its control if it knows or should know about discrimination at the client site.9U.S. Equal Employment Opportunity Commission. Enforcement Guidance: Application of EEO Laws to Contingent Workers Placed by Temporary Employment Agencies A staffing agency that simply reassigns a worker who reports harassment has not necessarily done enough.
Retaliation cases follow the same logic. If a staffing agency pulls a worker from an assignment because the client asked for the removal, and the reason for the request was that the worker complained about discrimination, both employers can be held liable. The client induced the retaliation and the agency carried it out.10U.S. Equal Employment Opportunity Commission. Enforcement Guidance on Retaliation and Related Issues
Damage Caps
Compensatory and punitive damages under Title VII are capped by employer size. Combined compensatory damages for emotional distress and punitive damages cannot exceed:
- 15 to 100 employees: $50,000 per claimant
- 101 to 200 employees: $100,000 per claimant
- 201 to 500 employees: $200,000 per claimant
- More than 500 employees: $300,000 per claimant
These caps apply per respondent, so in a co-employment case where the staffing agency and the client are separate entities with different employee counts, each faces its own cap. Back pay and front pay are not subject to these caps, and jointly liable employers can each be required to pay the full amount of those remedies.11Office of the Law Revision Counsel. 42 USC 1981a – Damages in Cases of Intentional Discrimination in Employment
Workplace Safety Violations
OSHA treats staffing agencies and host employers as joint employers of temporary workers, and both must work together to meet Occupational Safety and Health Act requirements.12Occupational Safety and Health Administration. Protecting Temporary Workers
Under OSHA’s multi-employer citation policy, more than one employer can be cited for the same hazardous condition. The policy sorts employers into four roles (creating, exposing, correcting, and controlling) and asks whether each met the obligations of its role.13Occupational Safety and Health Administration. CPL 2-00.124 – Multi-Employer Citation Policy A host company with supervisory authority over a worksite can be cited as a controlling employer even when its own employees are not the ones exposed. The standard is not strict liability; it is whether the employer exercised reasonable care to monitor conditions and enforce compliance.
Training splits along predictable lines. The staffing agency provides general safety training that applies across workplaces, and the host employer provides site-specific training on the hazards workers will actually encounter. Host employers should give temporary workers safety training equivalent to what their own employees receive for the same work.12Occupational Safety and Health Administration. Protecting Temporary Workers When a worker is injured and no one trained them on the specific hazard, both employers face citations, and civil suits when the injury falls outside workers’ compensation exclusivity.
Tax Penalties for Misclassification
The IRS looks at three categories of evidence to decide whether a worker is an employee: behavioral control over how the work is done, financial control over payment method and expenses, and the type of relationship between the parties.2Internal Revenue Service. Employee (Common-Law Employee) A company that fails the test owes back employment taxes for every misclassified worker, including unpaid income tax withholding, Social Security, and Medicare contributions.
Section 3509 of the Internal Revenue Code sets penalty rates for employers who misclassified workers but filed 1099 forms for them. With reasonable cause for the misclassification, the penalty is 20% of the employee’s share of FICA taxes. Without reasonable cause, that rate doubles to 40%. These reduced rates do not apply when the employer intentionally disregarded the withholding requirement, and they do not cover the employer’s own share of FICA or federal unemployment taxes, which are owed in full.
In co-employment situations, the IRS can look through the staffing arrangement to identify who actually controlled the worker. If a host company directed day-to-day tasks while the staffing agency handled only payroll, the IRS may treat the host as the true employer for tax purposes. The back-tax liability, plus penalties and interest, often exceeds what the company saved through the arrangement.
What Contracts Between Co-Employers Can and Can’t Do
Staffing agreements almost always include indemnification clauses that try to allocate financial risk. A well-drafted contract typically requires the staffing agency to indemnify the client for claims arising from the agency’s own negligence, such as failing to screen workers, mishandling payroll taxes, or violating laws in its capacity as employer of record.
Indemnification does not eliminate joint employer liability. It only decides which company ultimately pays after both have been held liable to the worker. A court will still hold both companies responsible to the employee, and courts will not enforce indemnification clauses that try to shift liability for a company’s own intentional discrimination, wage theft, or safety violations. Public policy prevents a company from contracting away accountability for its own wrongful conduct.
The most protective approach for host companies includes requiring the staffing agency to carry adequate insurance, specifying which employer handles tax withholding and benefits enrollment, and clearly defining who supervises workers on a daily basis. That last point matters most, because day-to-day control is the single factor that runs through every category of co-employment claim, from FLSA to Title VII to OSHA. A company that wants to avoid joint employer status has to actually let the staffing agency manage its own workforce, not just put that arrangement on paper while running the show in practice.
The NLRA Joint Employer Standard, Briefly
One boundary is worth flagging because staffing arrangements often raise it. Under the National Labor Relations Act, a company is currently a joint employer only if it has actually exercised direct and immediate control over workers’ essential terms of employment, not merely held the contractual ability to do so. The NLRB’s 2023 rule that would have again treated reserved and indirect control as sufficient was vacated by a federal judge in Texas in March 2024,14National Labor Relations Board. NLRB’s Joint-Employer Rule Vacated by U.S. District Judge and the Board reinstated the narrower 2020 standard.15National Labor Relations Board. NLRB Overrules Browning-Ferris Industries and Reinstates Prior Joint-Employer Standard A host that sets a staffing agency’s workers’ schedules, disciplines them directly, or controls their pay rates is a joint employer under the NLRA. A host that contracts with an agency and lets the agency manage its workers is not, even if the contract technically reserves the right to step in.