Take note of the latest outsourcing trend: Employer liability for contractors’ discriminatory acts

Most employers assume if they outsource their HR functions to independent contractors, so, too, will they not be held liable for their contractors’ discriminatory acts. That is simply not the case. As the Second Circuit’s recent decision in Halpert v. Manhattan Apartments, Inc., illustrates, just because you have hired an independent contractor to recruit and hire the staff for your company, it does not mean that you are off the hook for the contractor’s bad acts. Kinda scary when outsourcing HR is so commonplace in big business.

Just the facts. Michael Halpert interviewed for a position that required showing rental apartments for Manhattan Apartments, Inc. (MAI). The interview was conducted by the “apparent” hiring agent for MAI, Robert Brooks. During the interview, Brooks allegedly told Halpert that he was “too old” for the position. Not surprisingly, our applicant filed suit under the Age Discrimination in Employment Act (ADEA). The district court dismissed the case, finding that Brooks was an independent contractor, not an employee of MAI, and, the ADEA “does not apply to independent contractors.”

The Second Circuit reversed, holding that “an employer may be liable for discrimination by third parties, including independent contractors, that [it] authorizes to make hiring decisions on its behalf.” By its terms, explained the circuit court, employer liability under the ADEA is direct, not derivative: an employer may not “fail or refuse to hire… any individual…because of such individual’s age.” And, when liability for discrimination is “direct,” that prohibition applies to employers regardless of whether the employer “uses its employees to interview applicants for open positions, or whether it uses intermediaries such as independent contractors to fill that role,” explained the court. “If a company gives someone authority to interview applicants and make hiring decisions on behalf of the company, the company may be held liable if that contractor discriminates against an applicant because of the applicant’s age,” wrote the court.

Ultimately, MAI’s potential liability turned on whether Brooks was acting as the (apparent) hiring agent for the rental company when he interviewed Halpert for the position, or whether Brooks was simply hiring an employee on his own behalf. The Second Circuit observed that there were triable issues of fact precluding dismissal of the case on that issue: (1) MAI sponsored a training program for individuals hired to show the apartments and those chosen for the program would earn commissions from MAI; (2) MAI enlisted so-called “sales associates” like Brooks to interview candidates for the program; (3) the career counselor, who arranged the interview for Halpert, believed he would be interviewing for a position with the MAI, not Brooks; (4) the interview took place at the rental company’s offices; and (5) after the interview, both Brooks and another rental company associate told the counselor they were looking for someone younger.

There was also an agreement between MAI and Brooks, which set forth in great detail the rights and duties of both parties, especially with respect to Brooks’ jobs functions as a sales associate. While Brooks was to pay “his own expenses,” including “automobile, travel and entertainment expenses,” the agreement did not indicate that he was to compensate showers directly. MAI also presented affidavits from Brooks and an MAI representative asserting that Halpert, if hired, would have been compensated by Brooks, not MAI. But, MAI failed to corroborate the affidavits. In all, we are left with evidence cutting both ways.

What does all this mean? Every year we see an increase in HR outsourcing…the obvious reason being because it is “cost effective.” According to a recent survey from HR consultant Hewitt Associates, 94 percent of companies outsource at least one HR function or program. A case like Halpert serves as a warning to employers who want to outsource their recruitment and hiring functions. Employers will not be released from their obligations under federal anti-discrimination laws just because they have authorized independent contractors to make hiring decisions on their behalf. This should be taken into account when structuring any contract that outsources your HR functions. Perhaps a clause in the agreement requiring the independent contractor to buck up on its anti-discrimination training couldn’t hurt…for both parties.