Excerpt from Chapter 4 of Co-Employment: Employer Liability Issues in Third-Party Staffing Arrangements
Laws and Regulations
For the purposes of this book, the statutes and regulations dealing with co-employment, as well as related court cases, administrative rulings, and policy decisions, have been grouped into two broad categories:
(1) compensation and benefits, and (2) employment practices. In general, liability for compensation and benefits is governed primarily by the operational relationship between the individual and the employer (e.g., the degree of direction and control over the employee, and the nature of any agreements). Liability for employment practices is governed both by the structure of the working relationship and by the employer's action or inaction as it affects the employee (e.g., unlawful discrimination and unsafe working conditions).
Compensation and Benefits
Workers' Compensation
The quintessential co-employment issue involves workers' compensation insurance. It has the longest legal pedigree and is by far the area most discussed by the courts. Ironically, it is also the one area in which clients may benefit from being a co-employer with their staffing firm because, in most states, that status protects them from tort liability for workplace injuries sustained by a staffing firm's employees.
General Employers and Special Employers
As every employer knows, state workers' compensation laws provide benefits on a no-fault basis to employees accidentally injured on the job. The basic premise of these laws is that, in return for such protection, employees are barred from suing their employer for damages. In other words, workers' compensation generally is the employee's exclusive remedy for workplace injuries.
Application of Exclusive Remedy Rule
In a long line of cases, courts in most jurisdictions have extended the exclusive remedy provisions of state workers' compensation laws to clients of temporary staffing firms. In reaching this conclusion, courts have applied the common-law "loaned" (or "borrowed") employee doctrine, under which the client is viewed as a special employer (the staffing firm being the general employer) of the loaned worker. At least 13 states have codified this principle in their state statutes.9 (For a listing of court cases and statutes by state, see Appendix C.)
The key elements in establishing a client's special employer status are that the client supervises the individual's work; the assigned employee has consented to the arrangement, and the work is essentially that of the client. All three elements generally can be established in the typical staffing arrangement. Thus, the exclusive remedy defense is usually available to clients in suits brought against them by staffing firm employees for negligence in work site injury cases. The defense will not, however, protect a client that injures an employee intentionally. It also may not protect clients whose written contracts with staffing firms expressly disclaim any employment relationship with employees assigned to them10 or clients with managed services arrangements (see Chapter 2, p. 14) in which they have no day-to-day control over workers' activities.
Some states have, in certain circumstances, allowed employees of a contractor to bring suit against a client for damages beyond the workers' compensation award.11 In some cases, courts have distinguished contracts in which a contractor performs a specific function for a client from a temporary service that merely loans its employees to the client, holding that employees who are controlled by the client and perform its work are loaned employees who cannot sue the client for negligence.12 Some courts have denied a temporary employee's claim against a client based on the negligence of the client's employee where the client's payment to the staffing firm included an amount for workers' compensation coverage.13
It should be noted that even in cases where the employee is allowed to sue the client, staffing firms still could protect the client through contractual indemnification provisions backed by adequate liability insurance coverage.
Client as Statutory Employer—Alternate Employer Endorsement
Some states hold clients directly liable to staffing company employees for the payment of workers' compensation benefits, even when the staffing company has expressly agreed to provide coverage. This requirement is based on strict application of the common-law rule that the employer that directs an employee's activities at the work site is the employer and therefore must be the employer for workers' compensation purposes.14 In these states, staffing companies should ensure that their workers' compensation policies contain a temporary service contractor or alternate employer endorsement. These endorsements require the staffing firm's carrier to provide benefits directly to clients in the event that state law prevents payment of benefits to the employee. They also preclude the staffing firm's carrier from seeking reimbursement from the client's carrier.
Note that in states where the client is viewed as the sole employer for workers' compensation, the staffing company may be exposed to liability for negligence if sued by its own workers injured on the job because it cannot claim immunity as an employer.15 But most states treat both clients and staffing companies as employers for workers' compensation purposes.16
Fellow Employee Rule
In addition to protecting employers from tort liability, most state workers' compensation statutes protect fellow employees from suing each other for job-related injuries. (See Larson's Worker's Compensation Law, Ch. 111.) For example, a temporary employee who negligently injures a client's employee on the job generally cannot be sued by the client's employee because the temporary worker is a special employee of the client and therefore a fellow employee of the client's employee. The question is whether the client's employee has any recourse against the staffing firm.
A number of courts have allowed a client employee to sue a staffing firm on the ground that there was no employment relationship between the staffing firm and the client's employee, and therefore the staffing firm is not immune from suit.17 But to recover damages from the staffing firm in such cases, the client employee must show that the staffing firm is liable under the principle of respondeat superior (i.e., that the staffing firm had a right to control its temporary employee's activities at the work site or that the employee was performing work primarily for the staffing firm, not the client). This burden may be more difficult to meet in some states18 than in others.19 At least one court has held, however, that a staffing firm automatically enjoys the same immunity conferred on its employees and therefore cannot be sued by a client's employees.20 In 1999, North Dakota codified protection for staffing firms against suits by employees of the client.21
Waivers of Client Liability
Courts in Arkansas and Massachusetts have upheld the validity of waivers executed by staffing firm workers in which the workers gave up their rights to sue any client for injuries covered by state workers' compensation laws.22 In these states, a properly drafted and executed waiver may protect clients from liability for workplace injuries caused by negligence. Waivers may be viable in other states, and staffing firms should consult with legal counsel regarding their use.
Special Rules for Employee Leasing Firms
Specific state regulations may apply to employee leasing firms with respect to workers' compensation liability. In response to abuses involving employers transferring their employees to leasing company payrolls to avoid high experience modifications, the National Association of Insurance Commissioners and the National Council on Compensation Insurance have adopted model regulations that have been adopted in many states. Information on these regulations is available at the NCCI Web site, ncci.com.
Employers considering participation in an employee leasing arrangement should check with their state workers' compensation department to determine how such an arrangement will be treated for workers' compensation purposes. Most employee-leasing licensing and registration laws provide that a leasing firm and its clients are protected from injury suits by the workers' compensation exclusive remedy rule.
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9. See ALA. CODE § 25-14-9; FLA. STAT. ANN. § 440.11(2); GA. CODE ANN. § 34-9-11; IDAHO CODE § 72-103; ME. REV. STAT. ANN. tit. 39-A §104; MONT. CODE ANN. § 39-8-207(8)(b) (applies to professional employer organizations only); N.D. CENT. CODE § 65-01-08(2); OR. REV. STAT. § 656.018(5)(b); CONSOL. LAWS OF N.Y. ANN. § 922; R.I. GEN. LAWS § 28 29-2(6); UTAH CODE ANN. § 34A-2-105; VA. CODE ANN. § 65.2-803.1; WIS. STAT. ANN. § 102.29(6).
10. See, e.g., Parson v. Procter & Gamble, 514 N.W.2d 891 (Iowa 1994); Swanson v. White Consolidated Industries Inc., 77 F.3d 223 (8th Cir. 1996); cf. M.J. Daly Co. v. Varney, 695 S.W.2d 400 (Ky. 1985) (temporary employee expressly refused employment with client).
11. See, e.g., Pate v. Marathon Steel Co., 777 P.2d 428 (Utah 1989); Runcorn v. Shearer Lumber Products Inc., 107 Idaho 389, 690 P.2d 324 (Idaho 1984); Card v. Curtis Prunty, No. 91946 (4th District, Idaho, Nov. 21, 1989). Cf., Koch Refining Co. v. Chapa, 11 S.W.3d 153 (Tex. 1999) (leasing firm employee assigned to contractor may not sue client/premises owner for workplace injuries when client did not have right to control worker); Hittel v. WOTCO, 996 P.2d 673 (Wyo. 2000) (staffing firm employee assigned to contractor may not sue client/premises owner for workplace injuries when client retained no right to control work site safety); Smith v. Wal-Mart Stores East, 2005 WL 2243355 (W.D.Ky. Sept. 14, 2005) (federal court said staffing firm worker assigned to cellular company's kiosk in department store can sue store for workplace injuries because cellular company was not a subcontractor of store).
12. Lines v. Idaho Forest Industries, 872 P.2d 725 (Idaho 1994).
13. Ghersi v. Salazar, 883 P.2d 1352 (Utah 1994); Walker v. U.S. General, 916 P.2d 903 (Utah 1996).
14. See, e.g., Virginia Polytechnic Institute and State Univ. v. Frye, 6 Va. App. 589, 371 S.E.2d 34 (Va. Ct. App. 1988); English v. Lehigh County Authority, 286 Pa. Super. 312, 428 A.2d 1343 (Pa. Super. Ct. 1981); JFC Temps Inc. v. Workmen's Compensation Appeal Board, 545 Pa. 149, 680 A.2d 862 (Pa. 1996); Shaw v. Thrift Drug, No. A98-5170,1999 WL 994020 (E.D. Pa. Nov. 2, 1999); Kappas v. Andritz, 45 Pa. D. & C. 4th 288 (Pa. Com. Pl. March 17, 2000), aff'd without op. 769 A.2d 1215 (Pa. Super. 2000), cert. denied 566 Pa. 665, 782 A.2d 547 (Pa. 2001).
15. See, e.g., Kappas, supra note 14.
16. See, e.g., Wingfoot Enterprises v. Alvarado, 111 S.W.3d 134 (2003). For a complete discussion of dual employment issues in the area of workers' compensation insurance, see A. LARSON, 3 LARSON'S WORKERS' COMPENSATION LAW, § 67-68 (2001).
17. See, e.g., Marsh v. Tilley, 26 Cal. 3d 486, 606 P.2d 355, 162 Cal. Rptr. 320 (Cal. 1980); Kenyon v. Second Precinct Lounge, 177 Mich. App. 482, 442 N.W.2d 696 (Mich. Ct. App. 1989); Kunz v. Beneficial Temporaries, 921 P.2d 456 (Utah 1996); Morgan v. ABC Manufacturer, 710 So. 2d 1077 (La. 1998); Butts v. Express Personnel Services, 73 S.W.3d 825 (2002) (a Manpower employee injured by an Express Personnel employee was able to sue Express because no employment relationship existed between the two workers). See also, Warr v. QPS Companies Inc. 2206 WL 3783124 (Wisc. App.).
18. Kunz, supra note 17.
19. Cf. Bright v. Cargill, 251 Kan. 387, 837 P.2d 348 (Kan. 1992); Alvarado v. Ursua, No. B172601, 2005 WL 1125180 (Cal. App. 2 Dist. May 13, 2005). Not Reported in Cal.Rptr.3d. (California court of appeals held that staffing firm could be liable for injury caused by its temporary employee because it retained partial control over employee but dismissed claim because he was a fellow employee of the injured employee and therefore immune from liability under state law.) But employees of two different subcontractors may not be considered co-employees even if they share the same special employer. See Street v. Alpha Construction Services 143 P.3d (NM Ct. App. 2006) Cert. granted Sept. 21, 2006.
20. Parker v. Williams & Madjanik, 269 S.C. 662, 239 S.E.2d 487 (S.C. 1977).
21. N.D. CENT. CODE. § 65-01-08(2).
22. Horner v. Boston Edison Co., 45 Mass. App. Ct. 139, 695 N.E.2d 1093 (Mass. App. Ct.), cert. denied, 428 Mass. 1104 (Mass. 1998); Edgin v. Entergy Operations, 331 Ark. 162, 961 S.W.2d 724 (Ark. 1998). In Swisher v. Caterpillar Inc., 65 Pa. D. & C.4th 32 (Pa.Com.Pl. Dec 23, 2003), a Pennsylvania court relied on Horner and Edgin to find that a staffing firm worker who signed a waiver gave up his right to sue any client of the staffing firm, but an appellate court reversed without comment, Swisher v. Caterpiller, 888 A.2d 19 (Pa.Super. Sep 06, 2005) (TABLE, NO. 55 MDA 2004), and the Pennsylvania Supreme Court refused to hear the matter, Swisher v. Caterpillar Inc., 902 A.2d 1242 (Pa. Jun 30, 2006) (TABLE, NO. 869 MAL 2005).
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