Protect yourself: Every employer needs to understand the Borrowed Servant Doctrine

Temp and contingent workers and “lent” employees are becoming a permanent fixture in an economy where employees crave flexibility, labor competition is fierce, technological skills are in high demand, and benefit costs are significant. This growing and increasingly multifaceted worker class is rapidly changing how companies fill jobs and the makeup of their workforce. Given this trend, companies must be alert to the issues surrounding this class of worker, including workers’ compensation and tort liability.

There is an old rule known as the “Borrowed Servant Doctrine” that creates a special employment relationship where the lending employer is the “general” or “regular” employer, the borrowing employer is the “special” employer, and the employee is the “borrowed servant.” Some lawyers argue that this outdated master-servant language can easily prejudice a jury.

The doctrine is recognized in almost all states, although the specific tests used to determine if a particular worker qualifies as a “borrowed servant” and the employer as a “special employer” do vary. The majority of tests revolve around the question of control, both over the work that is being done and the manner in which it is performed. Many states have adopted a three-part test:

  1. The employee has made a contract of hire, express or implied, with the special employer (consent may be inferred from the employee’s acceptance of the special employer’s control or direction)
  2. The work being done is essentially that of the special employer; and
  3. The special employer has the right to control the details of the work.

Most common relationships that lend themselves to special employer situations

  • Skilled or unskilled labor employed by a temporary staffing agency
  • Property managers who work at a specific property
  • Employees who are hired to work at a client’s location, such as IT personnel and accountants
  • Contractual relationships between a general contractor and subcontractor or equipment rental companies

This doctrine does not apply to employee leasing operations such as PEOs and, in most cases, does not apply to independent contractors.

Why it’s important to understand the terms of the relationship

  • If not protected by a contractual agreement, the workers’ compensation policy of the special employer could be tapped to provide benefits for “borrowed servants,” increasing premiums for additional employees and rates, if someone is injured.
  • An injured “borrowed servant” can sue the person who caused the injury and that person’s direct employer, if the employer is not a “special employer”.

Contrasting two legal decisions illustrates the importance of protecting the company before entering into such hiring agreements. In Gregory v. Pearson, a temp working for Cleveland County in North Carolina filed a lawsuit against the County after suffering a workplace injury. While the County argued that the lawsuit was barred by the special employment and exclusive remedy doctrines and the trial court agreed, the Court of Appeals reversed the decision. Noting that the contract between the temp agency and the County expressly stated that temporary workers were not employees of the County, the Court held that the County failed to satisfy the first requirement of the special employment doctrine, i.e., that the employee had entered a contract of employment with the County. The temp was, therefore, not a special employee, and her case was not barred by the exclusive remedy doctrine.

In Massachusetts, an employee of American Resource Staffing Network, Inc. (ARS) was injured while on assignment at ARS’s customer, State Garden, Inc. (State Garden). The worker was awarded workers’ compensation benefits under ARS’s workers’ compensation insurance policy. The state statute permits injured workers to bring suit against “any person other” than the insured employer who may be liable for the worker’s injuries and the worker sued State Garden claiming that its negligence caused his injury in Molina vs. State Garden, Inc. The contract between ARS and State Garden included an “alternate employer endorsement” to ARS’s workers’ compensation insurance policy. That endorsement provided that ARS’s worker’s compensation policy “will apply as though the alternate employer [State Garden] is insured.” Thus, the Appeals Court determined that the exclusive remedy of workers’ compensation protected State Garden.

Protection options for employers

  • Alternate Employer Endorsement is designed to extend Workers’ Compensation protection to the special employer’s “borrowed servants.” Attached to the general employer’s policy, the endorsement specifically names the special employer, thus extending the required Workers’ Compensation protection without the need of the special employer to make any adjustment to its policy. Insurance expert, Christopher Boggs, Executive Director / Virtual University at Independent Insurance Agents and Brokers of America, notes, “If you are the special employer, this could be a good solution, but if you are the direct employer moving the coverage to the special employer may be the best solution.”
  • Multiple Coordinated Policy Endorsement extends benefits to the borrowed employees rather than having to depend on the staffing firm for coverage, if the staffing agency is unwilling to name the special employer as an alternate employer.
  • Contractual risk transfer. Require the “general employer” to indemnify the “special employer” against all losses, damages and claims arising from the negligence of the “borrowed servant.”
  • Require the “general employer” to name the “special employer” an additional insured under the “general employers” GL Policy.

The determination of the existence of the special employer relationship is based on the particular facts of the case and no two cases are exactly the same. It is the reality of the control that is relinquished to the “special employer,” not the parties’ characterization of the relationship that will determine the outcome.

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