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

“The vital test in determining whether a workman furnished by [the primary employer] is a servant of [the special employer] is whether they (the employee(s)) are subject to the “special employer’s” control or right of control not only with regard to the work to be done but also with regard to the employee’s manner of performing it.” This paraphrase (changed to remove specificities) of the 1935 Pennsylvania Supreme Court’s ruling in Venezia v. Philadelphia Electric Company has been the basis upon which questions, suits and claims involving supposed borrowed servants have been answered, decided and settled.

Workers’ compensation coverage is designed to be the sole remedy for the injured employee and a protection against lawsuits for the employer (except in cases of egregious acts). The next several paragraphs attempt to define who the “employer” is or may be — with a particular emphasis on the “borrowed servant doctrine.”

Three ‘Employers’

Employee-employer relationships presuppose certain duties and responsibilities upon each party; such a relationship can exist outside the usual and customarily understood context of employment. Understanding how status as the employer can be created allows the client and its agent the opportunity to manage the risk before the injury occurs. Employer status can be created in one of three ways:

• As a primary/direct or de facto employer;
• As a statutory/ de jure employer; or
• As a “special employer.”

Primary/Direct or De Facto Employer

Direct employment is the traditional and most common employer-employee relationship. Status as a direct or primary employer is generally created via a contract of hire. Such contract may either be a formal written contract or an understood contract. Both “types” of contracts follow and flow from negotiations, the employer’s offer of employment and the offer’s acceptance by the employee. All or nearly all direct employer-employee relationships share the same rights and operate in essentially the same manner (not an all-inclusive list):

• The right to hire and fire any employee (as allowed by state law) is vested solely in the direct employer.
• Direct/primary employers exercise or have the right to exercise absolute control over the employee. Work hours, work methods and work location are all controlled by the direct/primary employer.
• Employees of direct employers generally do not or are not necessarily allowed to work for anyone other than the direct employer without the employer’s express permission or at the employer’s direction.
• Remuneration is paid by direct employers, whether a sole proprietor, partner, corporation or other entity, on a regularly scheduled basis via either a salary, commission, piecework basis or some other means. This is usually the employee’s sole source (or primary source) of individual income.
• If the employer provides employee benefits, direct employees are eligible to receive and can reasonably expect these benefits.
• Applicable taxes are withheld from the worker’s paycheck.
• Employees of direct employers are generally eligible to receive state and/or federally-mandated unemployment benefits if they do lose their job.

A de facto employer is an employer “in fact or in reality.” Employees often referred to as independent contractors are “in fact” employees. Employers may try to dodge federal and state employment laws, withholding requirements or the providing of benefits by classifying “factual” (or de facto) employees as independent contractors. The degree of control exercised by the employer (as delineated above) often influences the worker’s classification as either a true independent contractor or a de facto employee.

Workers’ compensation rules are rather strict regarding the true nature and classification of a particular worker. The higher the degree of control over the worker, the more likely he will be considered an employee rather than an independent contractor. “Control” is defined later.

Direct and de facto employers are charged with providing workers’ compensation benefits as prescribed by individual state law. An employer’s violation of such requirements can result in criminal charges, fines and penalties (varying by state). Employers that lend or lease their direct employees to another employer (the special employer) are generally not relieved of their duty to provide workers’ compensation coverage; but this duty depends on the contract – if one exists. Knowing which direct employees remain the employer’s responsibility allows better planning of the workers’ compensation protection.

Statutory or De Jure Employers

Statutory or de jure employers are created by force of law. De jure and statutory can be used nearly synonymously as part of this discussion; de jure is defined to mean “by right or according to the law.” The employer is not the direct employer or even necessarily “related” to the statutory employee, but becomes the employer of record by action of the legislature and sometimes the findings of a court.

General contractors hiring uninsured subcontractors become the statutory or de jure employers of the uninsured subcontractor’s employees and are thus legally responsible to provide or arrange for workers’ compensation benefits to be paid to an injured worker. Forty-four states have codified this relationship.

Any worker injured while in the course and scope of employment for a statutory (de jure) employer must be extended the same protection and benefits as those owed to the employees of the direct employer. Indemnification and hold harmless agreements between a general contractor and a subcontractor can create a relationship that must be managed via endorsement to the workers’ compensation policy.

Special Employer

Control and the right of control is the overriding and deciding factor when analyzing the “borrowed servant doctrine.” Does the “special employer” have the absolute right to control the actions of the worker? As stated previously, control only over the work being done is not sufficient; before status as a special employer can be assigned, the right of control must also encompass the manner in which the work is performed.

Classification as a “special employer” is the third means by which an employer-employee relationship can be created. Of the three, this is the most unique as it is not created by a direct contract of hire or even by a statutory requirement; this relationship and the responsibilities that accompany it are born almost solely out of the right of control.

Defining ‘Control’

Employer-employee relationships impose specific duties and responsibilities upon each party. Employers are charged with many duties, among these are providing a safe and healthy work environment, making sure the correct tools are available to complete the assigned tasks, confirming that employees are properly trained and assuring that funds are available to cover the medical costs and/or lost wages should an injury occur (as per relevant statute). Employees, likewise, owe to their employer specific responsibilities; including the duty to do the job that is assigned to them and to do it to the best of their ability and with the best interest of their employer in mind.

Special employer situations under the “borrowed servant doctrine” are no different. Employer duty and employee responsibility are present, but such duties and responsibilities arise strictly from the right of control as has been presented in the opening paragraphs.

Each governmental body with an interest in this relationship and the insurance industry for its own purposes apply specific tests when working to establish whether a particular worker is due workers’ compensation protection under the “borrowed servant doctrine.” All of these interested parties list the “right of control” as one factor in the list of tests to be applied; but “control” itself is not defined by the individual tests, its definition is drawn and applied from other sources. Following are the markers that evidence “control:”

• The entity or person controls the manner in which the work is performed. Controlled workers are taken step-by-step through the process with the person in control confirming or providing the necessary training to complete each step leading to the desired outcome;
• The place of performance is delineated by the entity or person with control;
• Time of performance is mandated. The worker is expected to show up at specified times and work a set number of hours (with breaks for rest and lunch). When such specific period is over, the worker is free to leave;
• Details of the performance are mandated by the entity in control. The necessary tools, supplies and work areas are provided by the person or entity in control. The finished product must meet the controlling entity’s standards;
• The person supervising the worker is a direct employee of the entity or person that hired the worker; and
• The work is being done exclusively for the entity that hired the worker (although the employer may turn over the finished product to another person or entity). Essentially, the worker is benefiting only the employer’s business operation.

Absent sufficient evidence to the contrary, the original (direct) employer is presumed to retain control. But once the weight of the evidence based on the markers above conclusively shifts control to the “special employer,” then the remaining “borrowed servant doctrine” tests can be scrutinized to determine if a “doctrinal” employer-employee relationship exists.

To Be Continued

The Academy Journal’s next post completes this discussion on nonemployee “employees.” Part II delves into the other borrowed servant tests required to develop “employee” status. Additionally, common types of borrowed servants are introduced, and the possible workers’ compensation solutions are reviewed.

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 fifth 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
• Work Comp for PEOs and Their Client/ Employers
• Combinability of Insureds
• Audit Rules and Guidelines
• Audit Problems Leading to Additional Premiums

Topics Workers' Compensation Contractors Training Development