There are only a few work/employment situations that may lead to or lend themselves to special employer and borrowed servant situations. While this may not be an all-inclusive list, following are the most common:
• Temporary staffing operations. The employee works for a temporary staffing company that “leases” that worker to other entities to fulfill short-term or maybe even long-term employment needs. This is not to be confused with an employee leasing operation such as a PEO; that is a wholly different arrangement with different risk management concerns and different solutions. The contract between the staffing firm and the employer may require the staffing firm to provide the workers’ compensation coverage even though the leasing employer is, by all tests, the special employer.
• Property managers required by the property owner to extend workers’ compensation protection to the employees actively managing the property.
• Employee hired by the direct employer to work exclusively on or at the special employer’s location or job site. White v. Bethlehem Steel (US Court of Appeals decision in 2000) addressed this issue. The employer (C.J. Langenfelder & Son Inc) leased his equipment and employees to Bethlehem Steel. One of the employees had worked for Langenfelder for 26 years but had worked nearly exclusively at Bethlehem for that entire tenure. The employee was injured on the job; he collected the benefits due him from Langenfelder, but then sued Bethlehem Steel. The Court found that since Bethlehem met all the requirements, they were the special employer and he was a borrowed servant. With such a relationship, the injured party could not sue Bethlehem since workers’ compensation is the sole remedy in the employer-employee relationship. Such a relationship could also result from an accounting firm having an employee that works exclusively for one client and, in fact, has a desk at the client’s office and daily reports there without going to the employer’s location; or a computer/software company that keeps an employee on-site on a full-time basis for a large client; etc.
• Contractual relationships between a general contractor and subcontractor. Indemnification and hold harmless requirements may result in the general contractor becoming a special employer, especially in third-party-over suits. As detailed in an earlier article (Workers’ Compensation – Contractual Risk Transfer) the subcontractor or sub-subcontractor (and on down) could be held financially responsible for suits against a third party made by an injured employee, even if that employee received all the benefits due and did not sue the employer. Contractual relationships can potentially create a special employer exposure.
The Workers’ Compensation Solution??
Primary employers may not be relieved of their duty to provide workers’ compensation benefits to borrowed servant employees of a special employer. In fact, a contractual relationship may exist between the direct employer and the special employer specifically mandating that coverage be provided by the direct employer. The intention of this three-part borrowed servant series-in-a-series has been to spotlight the need for agents to discover the various employment relationships (be they overt or hidden in a contract) and offer a potential solution to the client and even the client’s customer.
The Alternate Employer Endorsement (WC 00 03 01A) is designed to extend workers’ compensation protection to the special employer’s “borrowed servants.” Attached to the direct employer’s policy, the endorsement specifically names the special (putative) employer thus extending the required workers’ compensation protection without the need of the putative employer to make any adjustment to their policy. If the putative (special) employer is the client, this should be the agent’s goal. The direct employer’s agent will likely recommend moving the coverage to the special employer. Regardless of the client and their position in this exchange, all parties need to be aware of and plan for the possibilities.
All four “borrowed servant” examples listed in the paragraphs above are eligible for the Alternate Employer Endorsement as per the endorsement instructions. However, these eligibility guidelines are only theoretical in nature; underwriting approval is not guaranteed, and it may not even be likely.
• Temporary staffing firms. Underwriters willing, from the outset, to provide coverage for a temporary staffing firm will likely understand the need for this coverage and agree to provide this endorsement to all clients under the contract. If, however, the underwriter is unwilling to name the special employer (the lessee) as an alternate employer, the special employer may need to attach the Multiple Coordinated Policy Endorsement (WC 00 03 23) to their workers’ compensation policy. This endorsement extends benefits to the leased employees rather than having to depend on the staffing firm for coverage. Agents writing coverage for the special employer need to be aware of the exposure and the availability of this endorsement;
• Property management firms. Again, underwriters may see and understand the need for this extension and agree to provide the endorsement when requested by the property owner;
• Employees working almost exclusively on the property of another. Underwriters may not be willing to extend such coverage as they may not see the need. If there is a contract, agents may be able to convince the underwriter to meet the contractual requirement; and
• Contractual risk transfer. It is unlikely an underwriter will ever allow the use of this endorsement in a contractual situation; doing so would be akin to naming the upper tier contractor as an additional insured (but is not as broad in that it only provides a means to finance the suit not protect against it). But the unwillingness of the underwriter to give this endorsement, especially if the CGL underwriter has altered the definition of an “insured contract” (see “Work Comp And CGL Gaps Necessitate Employers’ Liability Insurance“), may create a big out-of-pocket expense for the lower tier contractor. A lower tier contractor in an earlier article could have been out $2 million if the CGL redefined “insured contract.”
If the underwriter will not extend protection, the special employer should be notified that their workers’ compensation policy may be called upon to provide the required benefits due these borrowed servants. Likewise, agents whose clients may be considered the special employer need to advise them of the possibility that such protection may be required and that an accompanying additional premium may result (see “Workers’ Comp – Audit Problems and Additional Premiums“) from the additional employees.
Extra-Insurance (Other) Protection Provided by the Borrowed Servant Doctrine
Being considered a borrowed servant may extend unexpected protection to the worker and his direct employer apart from any workers’ compensation concern or matter. Such shielding arises out of the sole remedy protection living in workers’ compensation statutes.
Many if not most borrowed servant suits have little or nothing to do with workers’ compensation coverage, per se, but deal rather with the injured party’s rights to sue the person that caused their injury (the special employee) and that person’s direct employer.
Essentially, if the person causing the injury is “doctrinally” judged to be a borrowed servant they are considered an employee of the special employer. As a “fellow employee” of the injured person they cannot be held personally liable for the injured person (provided they did not act egregiously or intentionally) because workers’ compensation is the sole source for injury arising out of and in the course of employment, however caused.
Likewise, the direct employer of the borrowed servant cannot be held vicariously liable for the actions of its direct employee since that employee is under the control of another entity. The theory of respondeat superior (Latin for “let the master answer”) applies to the special employer not the direct employer due to the finding of fact regarding who has control of the employee. Since the special “master” has already responded by paying workers’ compensation benefits, the direct “master” has no need and cannot be compelled to contribute.
Any questions on this issue should be addressed with an attorney that specializes in employment law.
This ends the three-part mini-series on the “borrowed servant doctrine.” The insurance issues created by these relationships and other legal ramifications must be uncovered and properly managed by the servicing agent.
The workers’ compensation series is nearly complete with only a few articles remaining. The following commentary will address the issue of PEO’s and workers’ compensation protection – who protects whom and how?
All terms in this glossary and the glossary itself is taken from the book “The Insurance Professional’s Practical Guide to Workers’ Compensation: From History through Audit.” The book is available now to add to your insurance library.