The prime element of a workers compensation (WC) claim is the existence of an employer-employee relationship. If the injured employee seeks WC payments, the identity of the employer has to be determined. The fact that the employee is paid by a particular entity is not, in itself, conclusive in determining who is the employer; it is the fact of control over the employee that determines by whom he is employed.

In most instances, there is no question about the identity of the employer. However, an employee may be removed from this relationship, and thereby be taken out from under the WC policy of that employer, by the act of lending him to another. When this happens, when employer A lends an employee to employer B, the latter becomes liable for workers compensation coverage under certain circumstances. For example, a Florida appeals court, in J.M. Foster, Inc. v. N.A. Logan, Inc., 483 So. 2d 553 (1986), decided that if the employee has an express or implied contract for hire with employer B, if the work being done is essentially that of employer B, and if the power to control details of the work being done resides in employer B, then employer B (the employer who borrowed the employee) is liable for workers compensation benefits.

The three factors noted by the Florida court were also in evidence in a decision by a Louisiana court of appeals. In Robbins v. Lee, 505 So. 2d 1161 (1987), the court stated that Robbins was not a loaned employee because his act of helping to raise sheet metal was gratuitous and limited in scope and time; there was no contractual relationship and no control over Robbins exercised by Lee.

The United States Tax Court, in Professional & Executive Leasing, Inc. 89 TC 225 (1987), established a test consisting of seven factors to determine if an employment relationship exists. The court stated that the following areas had to be examined in order to accurately define the employment relationship: the degree of control over the work of the employees; any significant investment that the leasing company has made in the workplace; the realization of profit or loss by the leasing company; the integration of the work of the leased employees into the regular business operations of the leasing company; the right to hire and terminate; the type of work relationship, that is, permanent job versus temporary job; how the parties treat the relationship and what the parties consider that relationship to be.

These cases are grounded in an established legal doctrine. As noted in Black's Law Dictionary, the loaned servant doctrine provides that when one lends his servant to another for a particular employment, the servant must be dealt with as the servant of the one to whom he is lent. Then, if a dispute does arise over the circumstances of the employment and the status of the leased employee, it ultimately becomes a question of fact to be decided in a court room based on several generally accepted factors.

There are contractual and statutory points that need to be considered in addition to legal doctrine.

A firm that leases its employees to another firm may have spelled out contractually in the lease agreement which party must provide the workers compensation coverage. Presuming the existence of such a valid contract, the leased worker has the benefit of knowing coverage exists should he be injured on the job and all concerned parties are aware of their respective responsibilities.

Obviously, such a contractual agreement would have one of two alternatives. First, one or the other employer will provide workers compensation insurance and employers liability insurance; or second, both employers will provide the necessary coverage.

Under the first scenario, for example, employer A (the lessor) may be required by employer B (the lessee) to provide WC insurance and employers liability insurance. As a course of action, employer A can add the alternative employer endorsement, WC 00 03 01, to its existing WC policy. This endorsement applies to bodily injury to employees in the course of special or temporary employment by the alternative employer named in the schedule. The insurer agrees, under the terms of WC 00 03 01, to reimburse the alternative employer for the benefits required by the workers compensation law if the insurer is not permitted to pay the benefits directly to the persons entitled to them. The premium charged to employer A for this coverage is based on the classification of the employee while in the course of his special or temporary employment.

In the alternative, if both employers agree to provide workers compensation coverage and be liable for payment of the benefits, each should have its own WC policy. The agreement between the two employers may spell out the amounts of benefits and premiums to be paid by the respective parties with, for example, the employer who borrows the employee paying a premium on an “if any” basis, but it should be noted that the other insurance clause in the workers compensation policy states that benefits and costs covered by the insurance are on a pro-rata basis, subject to any limits of liability that may apply.

What if, however, one of the parties reneges on the contract or refuses to sign a contract? In this case, the employee must look to the relative state law, but generally, if the lessee employer can't or won't provide workers compensation benefits, that burden will by statute flow back to the lessor employer.

Just one instance of litigation of such statutory employment status is found in Dockery v. McMillan, 355 S.E.2d 153 (1987). In this case, a North Carolina appeals court held that a general employer is responsible for the payment of compensation benefits because, in contravention of North Carolina law, that employer had failed to ascertain whether or not the specialized employer (the borrower of the employee) had workers compensation insurance. The latter employer did not, so the state decided through the courts that the general employer would pay the benefits.

Any response from the general liability policy to an injured employee has to be considered in light of exclusions (d) and (e) on the commercial general liability coverage form. These are, of course, the exclusions dealing with any obligations of the insured under workers compensation laws and due to injury to an employee. See CGL Coverage Form—Coverage A in this volume for more information on these particular exclusions.

If a leased employee is under the exclusive control and direction of the employer to whom he is leased, he is dealt with “as the servant to whom he is lent”, as the employee of the lessee. Therefore, exclusions (d) and (e) should preclude the general liability policy of the lessee employer from applying to a claim from an injured leased employee. The same result would, of course, be true if for some reason the leased employee were considered an employee of the lessor employer — the CGL form of the lessor employer will not respond to a claim based on bodily injury to an employee.

It is true that an injured employee, today, is no longer necessarily limited to the exclusive remedy of workers compensation. However, the CGL form is also quite clear in excluding coverage of damages based on dual capacity or third-party-over ideas, ideas that are at the heart of the erosion of the exclusive remedy principle. See Workers Compensation and Exclusive Remedy for a discussion of workers compensation and the exclusive remedy theory.)

What is the result if a leased employee files a claim or a lawsuit against that employer not considered to be the employer of record? For example, the employee is leased from employer A to employer B who becomes legally responsible for the workers compensation benefits. The employee is injured while working for employer B; he receives WC benefits from B and then files suit against employer A claiming there was negligence in the manner of the leasing of the employee. The CGL form of employer A responds to such a claim. Exclusion (d) of the CGL form will not apply since the claim does not deal with any obligation arising from a workers compensation law; exclusion (e) of the form will not apply since that exclusion deals with injury to an employee of the insured arising out of and in the course of employment by the insured and the claim is based on the alleged negligence of the insured (employer A) and not his employment of the injured worker, who, by the way, has been deemed as the employee of employer B in this instance.

If employer A then files a third-party-over suit against employer B seeking to share the damages, exclusion (e) (2) (2) of B's CGL form applies and coverage is denied to B; this item states that exclusion (e) applies to any obligation to share damages with or repay someone else who must pay damages because of the injury. However, if employer B has purchased employers liability insurance, the third-party-over suit can be handled that way since such insurance pays, among other things, all sums the employer legally must pay as damages to a third party as a result of injury to the employee.

There are other facets of the commercial general liability form that should be mentioned at this time.

Exclusion (e) of the CGL form does not apply to liability assumed by the insured under an insured contract. Using the example noted above, if the injured leased employee sues employer A due to negligence in the manner of the leasing of the employee, and the lease agreement calls upon employer B to assume the tort liability of A, then the contractual coverage in the general liability policy of B would respond. It is possible, then, that employer B could provide workers compensation benefits plus general liability damages to the same employee for the same incident.

The current CGL form defines “employee” as including a “leased worker” and then goes on to define this latter term. The CGL form defines a ” leased worker” as “ a person leased to you by a labor leasing firm under an agreement between you and the labor leasing firm, to perform duties related to the conduct of your business”. What this means is that the CGL insurer does not want to allow general liability coverage for bodily injury to a leased worker. That leased worker is considered an employee of the named insured and, as such, is affected by the same exclusions (d and e) that preclude bodily injury coverage for an employee of the named insured. Bodily injury to a leased worker is meant to be covered under a workers compensation policy. Note that the term “leased worker” does not include a “temporary worker”; for more information on this particular term, see Commercial General Liability Definitions.