Nonemployee ‘Employees:’ The Borrowed Servant Doctrine – Part II

Part I of this “nonemployee, employee” mini-series introduced the three types of “employers” and began the discussion regarding what constitutes or creates control. Part II completes the conversation on establishing “control,” briefly describes common types of borrowed servants and introduces the possible workers’ compensation solutions.

Let’s begin by completing the discussion of control and the borrowed servant.

Other Borrowed Servant Tests

States and the federal government apply specific tests to determine if a particular worker qualifies as a “borrowed servant” and the employer as a “special employer.” The majority of these tests revolve around the question of control. The insurance industry, thanks to Lex Larson and his “Larson’s Workers’ Compensation,” marries the right of control detailed above with the various other tests to conceive and produce a three-part test to determine a worker’s status as a borrowed servant and the employer’s status as that of a special employer. These tests are:

1. Has the employee made a contract of hire, express or implied, with the special employer? In essence, has the direct employer volunteered or directed the employee to work for the special employer and has the employee agreed to such assignment;
2. Is the work being done essentially that of the special employer (as discussed under the right of control); and
3. Does the special employer have the right to control the details of the work?

If all of three questions are answered in the affirmative (“yes”), then the employer is almost certainly a special employer and the employee a borrowed servant. There are other tests not contemplated by Larson that may need to be or will be considered by the court to absolutely prove special employer and borrowed servant status, including:

• Does the presumed special employer have the right to discharge the worker? If so, that evidences a borrowed servant;
• Who has the obligation to pay the employee? If the employee is paid by the borrowing employer, this is more proof of “special employer” status;
• What is the course of dealings between the direct employer and the presumed special employer? Is there a contractual relationship or requirement? Employer-employee status can potentially be created by contract; and
• Is the lent employee a specialist? And does the presumed special employer have the skill or knowledge to supervise the manner in which the work is being performed? This is a “negative test.” If the borrowing employer does not have the ability or skill necessary, the lent worker will likely not be considered a borrowed servant since one cannot control what one does not understand and cannot do; thus the individual is not a putative employee but a specialist.

Combining and analyzing the right of control, Larson’s three-prong test and the four other distinguishing test factors will produce as nearly as possible a definitive answer to the question of “special employer” and a resulting “borrowed servant.” Special employers owe the same duties to their borrowed servants as they do to any direct employee. An employer-employee relationship is created that must be managed from both a human resources and a risk management angle.

Borrowed Servants

There are only a few work/employment situations that may lead to or lend themselves to special employer and borrowed servant situations. While this is not an all-inclusive list, the following are the most common:

• Temporary staffing operations. The employee works for a temporary staffing company that “leases” the 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 solutions (detailed in an upcoming article). 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 (U.S. 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 his 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, it was the special employer and White was a borrowed servant. The employee-employer relationship blocked White’s ability to sue Bethlehem since workers’ compensation is the sole remedy in the employer-employee relationship. Examples of such a relationship could be an accounting firm having an employee who 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. 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 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 employees who are considered borrowed servants of a special employer. In fact, a contractual relationship may exist between the direct employer and the special employer specifically stating that coverage is to be maintained by the direct employer. The point thus far has been to spotlight the need for agents to discover these relationships (be they overt or hidden in a contract) and offer a potential solution to the client and even the client’s customer (maybe winning a new account due to being so detail-oriented).

The Alternate Employer Endorsement (WC 00 03 01A) is designed to extend coverage when employees are considered the “borrowed servants” of a special employer. It is attached to the direct employer’s policy, naming the special employer thus extending protection from the employer’s policy to the putative employer.

Only the first three of the four “borrowed servant” examples listed above are eligible for the Alternate Employer Endorsement per the endorsement instructions. The fourth is not specifically allowed, but neither is this relationship excluded from use. Regardless, the allowed uses are only theoretical in nature and underwriting approval is not guaranteed; sometimes such approval may not even be likely.

• Temporary staffing firms. Underwriters willing to provide coverage, from the outset, 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 the 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 recognize 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,” may create a big out-of-pocket expense for the lower tier contractor. Even though not technically intended for this use, underwriters should be willing to extend this protection to protect its insured (the only loser is the personal injury attorney).

If the underwriter is unwilling to extend protection to the special employer, the special employer should be notified that its workers’ compensation policy may be called upon to provide the required benefits due the use of 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 from the additional employees.

Protection Provided by the Borrowed Servant Doctrine Not Necessarily Related to Insurance

Being considered a borrowed servant may extend unexpected protection to the worker and his direct employer apart from any workers’ compensation issue. Such protection arises out of the sole remedy protection living in workers’ compensation statutes.

Many, if not most, borrowed servant suits researched while constructing this article had little or nothing to do with workers’ compensation coverage, per se, but rather dealt with the injured party’s rights to sue the person who caused the injury and that person’s (the tortfeasor’s) direct employer.

Essentially, if the person causing the injury is “doctrinally” judged to be a borrowed servant, thus he is considered an employee of the special employer. As a “fellow employee” of the injured person he cannot be held personally liable for the injury caused to the special employer’s direct employee (provided the borrowed servant did not act egregiously or intentionally) because workers’ compensation is the sole source of recovery for injury arising out of and in the course of employment, however and by whomever 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.

Academy of Insurance Workers’ Comp Month

April 2015 is Workers’ Compensation Month for the Academy of Insurance. During the month the Academy hosts an in-depth, four-part webinar series focused on workers’ compensation. The topics are:

• The Course and Scope Rule and its Gray Areas (April 2)
• Employees, Independent Contractors, General Contractors and Contractual Risk Transfer in Work Comp (April 9)
• When to Add Additional States – Extraterritorial Jurisdiction Problems (April 16)
• The Surprising Importance of Employers’ Liability Protection (April 23)

Register now to assure a spot. Invite everyone in your office to attend (everyone in your office is welcome, only one registration required).

Workers’ Compensation Series

This is the sixth in a series of articles on workers’ compensation. The series is taken from the book, “The Insurance Professionals’ Practical Guide to Workers’ Compensation: From History through Audit.” The articles in this series are:

• Workers’ Compensation History: The Great Tradeoff
• Benefits Provided Under Workers’ Compensation Laws
• Second Injury Funds: Are They Still Necessary or Just a Drain On the System?
• Employees Exempt from Workers’ Compensation
• Nonemployee ‘Employees:’ The Borrowed Servant Doctrine – Part I
• Nonemployee ‘Employees:’ The Borrowed Servant Doctrine – Part II
• Work Comp for PEOs and Their Client/ Employers
• Combinability of Insureds
• Audit Rules and Guidelines
• Audit Problems Leading to Additional Premiums

Topics Lawsuits Workers' Compensation Underwriting Property Contractors