Leased Employee Hurt on the Job… Am I covered?

02.08.17 Leased Employee - Blog Header.png

Leasing employees has become an increasingly popular option among medium and small businesses that are looking at innovative ways for handling personnel matters, including payroll and benefits, and overall reducing their costsThe main benefit of leasing employees is that the leasing firm frees the company from administrative responsibilities associated with human resources and workforce management, so you are able to focus your attention on your business and meeting your business goals.

Leasing agencies promise to reduce expenses in a variety of areas, such as single business tax, unemployment taxes, workers’ compensation premiums, health insurance premiums and administrative expenses in managing employees.  Although the savings can appear attractive, extreme caution must be used when considering this option and it’s imperative to understand the risks you may be taking.

What could happen if my leased worker is injured on the job?

  • The leased employee or their family could make a claim against you.
  • A claim can be made against you by the workers’ compensation insurance carrier that insures the leasing agency.
  • An insurance company who provides employee benefits to the leased worker could make a claim against you seeking to recover what they have paid.
  • A claim can be made against you by an automobile insurer attempting to recover medical bills that they paid for the leased employee if they were hurt while using the company vehicle.
  • The leased employee could make a claim against you under YOUR workers’ compensation policy on the basis that they were really employed by you.

Doesn’t my workers’ compensation policy cover this type of claim?

  • No, the leasing company provides workers’ compensation for the leased worker.

Because the leasing company is providing the payroll services, the injured employee is paid under the leasing company’s tax ID number.  Your workers’ compensation carrier would deny the claim because based on the tax ID number, the leased employee does not match your tax ID number, thus is not considered an employee of your company.

If my workers’ compensation carrier denies the claim, I can just submit the claim to my commercial general liability carrier because the injury occurred on my premises….RIGHT?

  • Your CGL carrier would deny the claim. The CGL policy specifically excludes injury to an “employee” and the policy defines an “employee” as including a leased worker.

What are some of the consequences if the leased employee or others make a claim against me?

  • You will have to pay significant legal fees to sort it all out, and most of the costs cannot be recovered even if you win the judgement.
  • If you fight the lawsuit and lose, you could face an uninsured judgement that is substantial and would be disastrous for your company.
  • When your workers’ compensation carrier realizes you have a leased employee due to the submitted claim, it will likely charge you for those employees as if they were your statutory employees. This would be calculated according to your workers’ compensation rate with those additional employees and added on to that premium. You can be audited for this going back as far as three years.

I still want to have leased employees.  How can I protect myself from these pitfalls?

Solution #1:  Name your entity as an Alternate Employer

Have the leasing agency add you as an alternate employer as an endorsement to its workers’ compensation policy.  This will allow the leasing agency’s workers’ compensation policy to apply to you, the alternate employer, as if you were an insured under the leasing agency policy.

The workers’ compensation insurer for the leasing agency will not ask your workers’ compensation carrier to share the loss if you are name as an alternate employer.  This should block your carrier from asking for any additional premium from you when your policy expires.

Solution #2: Your CGL policy can add an endorsement which would remove the leased employee exclusion

Request that your insurance carrier add a leased employee endorsement that removed the leased employee exclusion onto your commercial general liability policy.

The advantage of having this endorsement is that your commercial liability carrier will pay for the legal fees to sort this out and pay judgments against you, if any.

Recommendation: Require the leasing agency to provide you with the following proof:

  • A copy of the actual alternate employer endorsement adding your company as the alternate employer on their workers’ compensation policy.
  • A certificate of insurance providing evidence of the coverages required in the leasing agreement.
  • Evidence that they have put an administrative system in place that will ensure that they verify each year that the alternate employer endorsement form has been renewed.

Leasing employees may be the solution to some of your administrative and human resources responsibilities and the best fit for you and your business.  However, it is not a strategy without risk.  Do your research, understand the different types of alternative work relationships, your employment laws, and legal obligations to avoid the unnecessary exposures and expensive problems in the future.

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About Marsh & McLennan Agency – Marsh & McLennan Agency LLC, a subsidiary of Marsh, was established in 2008 to meet the needs of midsize businesses in the United States. MMA operates autonomously from Marsh to offer employee benefits, executive benefits, retirement, commercial property & casualty, and personal lines to clients across the United States.

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