It could be the lease of your worries

In the 21st century workplace, employers are increasingly using the services of employee leasing firms to supplement their regular workforce because this alternative staffing arrangement provides employers with financial and administrative benefits.
For example, an employee leasing firm normally assumes all labor, insurance, administrative and overhead costs associated with the worker, resulting in a substantial savings to the employer.
However, a recent decision by Judge F. Dennis Saylor IV of the United States District Court in Massachusetts has raised a red flag for employers seeking to reap these benefits. The decision reminds employers that, even though they may want to realize these financial benefits, they may see those savings dissipated if they are not vigilant about making sure the type of insurance they purchase covers these workers.
The ruling in Scottsdale Ins. Co. v. Carrabassett Trading Co. signals to employers using employee leasing arrangements that they must pay careful attention to how they use such workers, because they may otherwise incur a large liability they never contemplated.
In short, an employer that isn’t vigilant about this issue may be responsible for any judgment obtained by an injured leased worker, instead of the leasing company.
This is precisely what occurred in Carrabassett, (460 F. Supp. 2d. 251 (D. Mass. 2006)). The leased worker – who had his left arm severed near the elbow by a wool picking machine – will not be able to collect from his employer’s commercial general liability policy because his employer failed to purchase a policy covering “leased workers.”
Under these circumstances, the Massachusetts workers’ compensation statute (G.L.c. 152, §18) does not bar a direct suit by the injured “leased worker” against the company using the services of the leased worker.

Insurance quandary
The insurance quandary for employers using this type of alternative staffing arrangement is framed by the language of a typical CGL policy. CGL policies are intended to protect an insured employer against liability for losses to third parties arising out of the operation of the insured’s business. See Monticello Ins. Co. v. Dion, 65 Mass. App. Ct. 46, 47 (2005).
In contrast, a worker’s compensation policy is designed to cover injuries to an employer’s workers in the workplace. See HDH Corp. v. Atlantic Charter Ins. Co., 425 Mass. 433, 436-40 (1997).
As a result of the difference in scope between CGL and workers compensation policies, a CGL policy usually contains an “employer exclusion,” which excludes injuries to the employer’s employees sustained within the scope of their employment for their employer. The “employer exclusion” operates in a fairly straightforward manner when the injured employee was hired directly by the employer and is a traditional employee of the employer.
The exclusion becomes more complicated when the injured worker is a person who was leased, furnished or provided to the employer by an employee leasing firm. Due to the popularity of this type of alternative staffing arrangement, the typical CGL policy includes provisions stating the exclusion applies to “leased workers” but not to “temporary workers.” The policy defines a “leased worker” to be a “person leased to [the client company] by a labor leasing firm, to perform duties related to the conduct of [the client company’s] business.”
A “temporary worker” is defined as “a person who is furnished to [the client company] to substitute for a permanent ‘employee’ on leave or to meet seasonal or short-term workload conditions.” The policy also provides that an “employee” includes a “leased worker but does not include a “temporary worker.”
The rationale for subjecting “leased workers” to the “employer exclusion” is that Massachusetts law requires employee leasing firms, like regular employers, to provide workers’ compensation insurance for their employees. See Carrabasset Trading Co., 460 F. Supp. 2d at 255; 211 CMR §111.04; G.L.c. 152, §25A.

‘Indefinite’ employee
In Carrabassett, the company argued the injured worker was a “temporary worker” because he was furnished to the employer by the labor leasing firm to meet “short-term workload” conditions caused by a higher demand for its product.
The court rejected this argument because the record disclosed that the worker was provided to the employer by the labor leasing firm for an “indefinite” period of time. In fact, over the course of a year, the worker had worked at the employer’s plant over 1,600 hours and would have continued working there for an indefinite period of time if he had not been injured on the job. The court’s conclusion demonstrates that companies using the services of employee leasing companies need to pay attention to how they use workers provided by such staffing companies. The decision signals that courts will not let these employers have it both ways.
In other words, employers using such workers for an indefinite period of time, in order to realize the payroll, administrative, insurance and overhead cost savings associated with these workers, will not be able to claim that these workers are covered by the employer’s CGL policy. This will expose the employers to paying any judgment the leased worker obtains against the employer.
The Carrabassett opinion also exposes the soft legal underbelly of a practice pursued by some employee leasing companies. The company in the case agued the injured worker was not a “leased worker” subject to the “employer exclusion” because there was no written lease between it and the employee leasing company. The company also argued the worker was not a “leased worker” because the leasing company maintained that it never used the term “lease” in its business and never heard of its arrangement being characterized as a “lease.”
The court made short shrift of these arguments by recognizing that what matters is the substance of the arrangement, not its form. In addition to recognizing that the policy does not require the lease to be in writing, the court construed the arrangement as an employment lease because the employee leasing firm provided the company with the right to use the worker’s services for a period of time in exchange for a fee.
It also found additional indicia of a labor lease, including the employee leasing firm determining the worker’s rate of pay, retaining final authority to continue the worker’s employment, and incurring the burden and cost of having to perform payroll, payroll tax, insurance, worker’s compensation and other administrative obligations in connection with the employment of the “leased worker.”

Business decision
Employers face a business decision when using “leased workers” for an indefinite or substantial period of time to avoid the payroll, insurance, administrative and overhead costs associated with full-time permanent employees.
On the one hand, employers may decide the chances of “leased” workers sustaining a serious injury on the job are so remote they are willing to accept the substantial economic and administrative benefits of using such workers. They may decide to take the risk that if one or more of these workers are injured on the job, they will be responsible for any judgment against the company, not the CGL carrier.
On the other hand, if the risk of these workers becoming seriously injured on the job is great, the employer may decide to investigate the availability and cost of a CGL policy endorsement which covers “leased workers.”
If the cost of such an endorsement is not prohibitive and does not outstrip the economic and administrative benefits of the employee leasing arrangement, purchasing an endorsement could protect the employer against a large judgment resulting from a catastrophic injury to one of its “leased workers.”
A third business option for employers is to negotiate with the employee leasing company a clause in a leased worker’s contract stating the leased worker waives the right to bring a claim or suit against the employer for damages based on injuries covered under the workers compensation statute.
Massachusetts courts have upheld such waiver clauses because employee leasing companies in the state are required to provide workers’ compensation benefits to their leased workers. See Horner v. Boston Edison Co., 45 Mass. App. Ct. 139 (1998); 211 CMR §111.04.
Steven P. Perlmutter is a partner in Robinson & Cole’s Boston office and a member of the firm’s trial and appellate section. His practice focuses on business, insurance, real estate and civil rights litigation in the federal and state courts. Steven can be reached at [email protected] or 617.557.5909.