"The vital test in determining whether a workman furnished by [the primary employer] is a servant of [the special employer] is whether they (the employee(s)) are subject to the "special employer's" control or right of control not only with regard to the work to be done but also with regard to the employee's manner of performing it." This paraphrase (changed to remove specificities) of the 1935 Pennsylvania Supreme Court's ruling in Venezia v. Philadelphia Electric Company has been the basis on which questions, suits and claims involving supposed borrowed servants has been answered and decided.

Workers' compensation coverage, as has been detailed, is to be the sole remedy for the injured employee and a protection against lawsuits for the employer (except in cases of egregious acts). Previous articles have defined who an "employee" is or may be; this and the next two commentaries will attempt to define who the "employer" is or may be - with a particular emphasis on the "borrowed servant doctrine."

Three "Employers"

Prior articles have inversely defined or delineated the employer by means of defining the "employee." Indirectly defining an employer can lead to misclassification of or simply missed employees leaving gaps in protection that could have been avoided if the relationship was recognized and properly managed up front. Employee-employer relationships presuppose certain duties and responsibilities upon each party; such a relationship can exist outside the usual and customarily understood context. Understanding how status as the employer can be created will allow the client and its agent the opportunity to manage the risk before the injury occurs. Employer status can be created in one of three ways:
• As a primary/direct or de facto employer;
• As a statutory/ de jure employer; or
• As a "special employer."

Primary and statutory employer statuses were inversely detailed in prior articles and are only highlighted in the following paragraphs. Status as a "special employer" is the focus of the two commentaries following; considerably more attention will be given to the creation and management of the "special employer" status.

Primary/Direct or De Facto Employer

Direct employment is the traditional and most common employer-employee relationship. Status as a direct or primary employer is generally created via a contract of hire. Such contract may either be a formal written contract or an understood contract that follows negotiations, the employer's offer to the worker of employment and an acceptance by the employee of the employment. All or nearly all direct employer-employee relationships share the same rights and operate in essentially the same manner (the following is not an all-inclusive list):

• The right to hire and fire any employee (as allowed by state law) is vested solely in the direct employer.

• Direct/primary employers exercise or have the right to exercise absolute control over their employee. Work hours, work methods and work location are all controlled by the direct/primary employer.

• Employees of direct employers generally do not or are not necessarily allowed to work for anyone other than the direct employer without the employer's express permission or at the employer's direction.

• Remuneration is paid by direct employers, whether a sole proprietor, partner, corporation or other entity, on a regularly scheduled basis via either a salary, commission, piecework basis or by some other means. This is usually the employee's sole source (or primary source) of individual income.

• If the employer provides employee benefits, direct employees are eligible to receive and can reasonably expect these benefits.

• Applicable taxes are withheld from the worker's paycheck.

• Employees of direct employers are generally eligible to receive state and/or Federally-mandated unemployment benefits if they do lose their job.

A de facto employer is an employer "in fact or in reality." Employees often referred to as independent contractors are "in fact" employees. Employers may try to get around or dodge federal and state employment laws, withholding requirement or the providing of benefits by classifying factual employees as independent contractors. The degree of control exercised by the employer (as delineated above) often influences the worker's classification as either a true independent contractor or a de facto employee.

IRS applies a much more lenient definition of independent contractor than does the insurance industry, particularly workers' compensation carriers. Not withholding taxes and operating under a separate entity name (with potentially a few other qualifications) may be all that is required for the IRS to consider a worker an independent contractor.

However, workers' compensation rules are more stringent regarding the true nature and classification of a particular worker. The higher the degree of control over the worker, the more likely he will be considered an employee rather than an independent contractor. "Control" is defined in the next article.

Direct and de facto employers are charged with providing workers' compensation benefits as prescribed by individual state law and discussed in previous articles. An employer's violation of such requirements can result in criminal charges, fines and penalties (varying by state). Employers that lend or lease their direct employees to another employer (the special employer) are generally not be relieved of their duty to provide workers' compensation coverage; this will depend on the contract if one exists. Knowing which direct employees remain the employer's responsibility allows better planning of the workers' compensation protection.

Statutory and De Jure Employers

Statutory or de jure employers are created by force of law. Two prior articles in this series - "Workers' Compensation - Who Is An Employee" and "Workers' Compensation - The General Contractor's Responsibility" - detailed the statutory relationships that create employer-employee relationships. De jure and statutory can be used nearly synonymously as part of this discussion; "de jure" is defined to mean "by right or according to the law." The employer is not the direct employer or even necessarily "related" to the statutory employee, but becomes the employer of record by a vote of the legislature and sometimes the findings of a court.

General contractors hiring uninsured subcontractors become the statutory or de jure employers of the uninsured subcontractor's employees and are thus legally responsible to provide or arrange for workers' compensation benefits to be paid to an injured worker. As detailed in the above articles, forty-four states codify this relationship.

Any worker injured while in the course and scope of employment for a statutory (de jure) employer must be extended the same protection and benefits as those owed to the employees of the direct employer. Indemnification and hold harmless agreements between a general contractor and a subcontractor can create a relationship that must be managed via endorsement to the workers' compensation policy.

Special Employer

Due to the complexity and detail necessary to adequately address the legal and coverage issues surrounding status as a "special employer," such discussion will be left for the next two posts to allow ample space and time to cover the aspects of exposure that arise out of the "borrowed servant doctrine." "Employment" situations that lend themselves to the possibility of this doctrine and a workers' compensation endorsement that can possibly be used to protect the direct employer in these circumstances will also be thrashed out in these posts.