Something Old, Something New, Someone Borrowed, Someone to Sue 

Workers’ Compensation Subrogation and Employee Leasing Companies 

By Gary L. Wickert 

At its core, workers' compensation subrogation is quite simple. Employee injured while at work receives workers compensation benefits. Carrier paying benefits recovers those benefits from anyone responsible for causing the injury other than the employer. As the saying goes, however, "Progress is man's ability to complicate the simple." Over time, exceptions, time limits, equitable prohibitions, made whole requirements, and politics have complicated workers' compensation subrogation in nearly every state. Nowhere is this complication for evident than in cases involving temporary employee, leased employee, and borrowed servant situations.  

It is not unusual for an employee to be subject to the direction and control of an entity other than his employer during the workday. This is especially common in construction situations. In such cases, many states employ the borrowed servant doctrine which states that an employee can become a “borrowed servant” of an entity other than his employer, for a limited period of time, while that employee is subject to the “special employer’s” right to control the details of the employee’s work. Just as each state has its own criteria for determining whether an employee is subject to the right of another to control the details of his work, some states provide that a borrowed servant becomes the employee of the “special employer”, which allows him to then sue his previous employer (general employer) as a “third party.” Still other states employ something known as the “dual employment doctrine,” which states that the employee can be employed by two employers at the same time, both of which are protected from being sued by the injured employee.  

Most claims handlers are familiar with the common law borrowed servant doctrine because of its application to the adjusting and handling of workers’ compensation claims. In determining whether or not a carrier is responsible for workers’ compensation benefits, the claims handler must look at whose employee the injured claimant was at the time of the injury. However, the borrowed servant doctrine can also be used as a defense to third-party lawsuits. Where the injured worker and the carrier sue a third party based on negligence, they will not be able to recover anything where the third party shows that the claimant was, in fact, their borrowed servant. Carr v. Carroll Co., 646 S.W.2d 561 (Tex. Civ. App. - Dallas 1992), writ ref’d n.r.e. In essence, they can then take advantage of the workers’ compensation bar. 

Professional Employer Organizations (PEO) 

The employee leasing business has grown to become a very competitive $200 billion annual industry with nearly 4,000 companies providing temporary employment, employee leasing, and staff leasing services. The definitions vary from state to state but are increasingly all subsumed under the umbrella title of Professional Employer Organizations (PEO). Some believe that a true PEO not supply labor to employers like a leasing or staffing service does. Instead, they claim that true PEOs supply employment and human resource services and benefits to its client and its existing employees. PEOs enter a "co-employment" relationship wherein it provides human resources services to the client, including access to health insurance, retirement savings plans, and other critical employee benefits. If a PEO relationship is terminated, the employees continue as employees of the client. 

By comparison, many believe that a leasing or staffing service supplies new workers, usually on a temporary or project-specific basis, to the client. These leased employees return to the staffing service for reassignment after completion of their work with the client company. Some are based on a work-to-hire basis wherein they become employees of the client company after a specified probationary period of being dual employees. In that situation, when the staffing or leasing company arrangement ends, the employee has no further relationship with the client. Clients in these relationships see employee leasing as a means of increasing the benefits that their employees receives and an effective strategy for getting rid of human resource paperwork.  

Special legislation has been enacted in many states that declares both the leasing company and the leasing company’s customer to be joint employers of the employee, under certain circumstances. And if things weren’t complicated enough for the subrogation professional, virtually every state has enacted special legislation in construction settings involving contractors and subcontractor, requiring general contractors to pick up the provision of workers’ compensation coverage where subcontractors fail to do so – thereby making “statutory employers” of the general contractors or other parties in the contractual food chain. While the subject of “statutory employers” and its application in all 50 states was discussed at length in the article Workers’ Compensation Subrogation In Construction Settings (see HERE), this article focuses on the challenges workers’ compensation subrogation professionals face when dealing with traditional borrowed servant/loaned employee, employee leasing companies, and professional temporary employment agencies.  

Some states, such as Texas, have enacted specific statutes to deal with this. Texas enacted the Texas Staff Leasing Services Act, which addresses the use of leased employees and their employers in Texas. Texas Labor Code § 91.001, et seq. This Act codified the dual employment theory in Texas and held that for staff leasing situations, both the leasing company and the customer may be deemed employers, worthy of the workers’ compensation bar. Texas also enacted the Temporary Common Worker Employer’s Act in 1991, covering temporary employment services who loan employees for short periods of time or even for a single day or task. Texas Labor Code § 92.001, et seq. (1991). The Temporary Common Worker Employer’s Act, unlike the Staff Leasing Services Act, does not specifically provide for dual employment in temporary employee leasing situations. Richard v. L.D. Brinkman & Co., 36 S.W.3d 903 (Tex. Civ. App. - Dallas 2001). Therefore, the law of each state should be looked at carefully to determine how borrowed servant scenarios are to be handled and what effect they will have on the right of the defendant to claim the benefit of the workers’ compensation bar. In some states, subrogation against the client of a staff leasing service is all but neutered, while in other states, such efforts still can be successful. Equitable subrogation/equitable contribution actions between workers’ compensation carriers for the leasing company and the customer are still possible, depending on the state involved. 

Each state varies with its application of the exclusive remedy rule to situations involving employee leasing companies and temporary employees. Some states set forth the respective rights of a worker and/or potential third-party tortfeasor in the workers’ compensation subrogation statute or other statutes, while other cases make declarations in established case law. Thirtythree (33) states have statutes or regulations which address employee leasing and its effect on which entity is the actual employer, while seventeen (17) states and the District of Columbia make such determinations via court decisions. Below is a summary of the laws in all 50 states. 

Alabama: An employee of a temporary services agency was also held to be an employee of the client company to which she was assigned to work for purposes of workers’ compensation, where the client company supervised her work and paid a fee to the temporary services agency which included an amount to obtain workers’ compensation insurance for the worker. Marlow v. Mid-South Tool Co., Inc., 535 So.2d 120 (Ala. 1988).  

Alaska: There is very little precedence and no statutory guidance given to us in Alaska. However, one case leads us to believe that both the general and special employers will be afforded protection under the exclusive remedy rule. Ruble v. Arctic General, Inc., 598 P.2d 95 (Alaska 1979). 

Arizona: Arizona’s statute dictates that a professional leasing organization is given protection under the exclusive remedy rule as a coemployer of the worker. A.R.S. § 23901.08. However, in order to be given immunity under the exclusive remedy rule, the parties must be in compliance with various regulations and rules regarding employee leasing.  

Arkansas: In Arkansas, a specific statute governs “Professional Employer Organizations”. It provides that both the employer organization and its client are considered coemployers, and both may avail themselves of the immunity provided under the exclusive remedy rule. A.C.A. § 2392409. 

California: In California, both the employee leasing firm and its client are considered to have made workers’ compensation insurance premium payments, and both are immune from a third-party suits, provided an employee leasing agreement has been executed and insurance coverage for the worker remained in effect throughout the length of his employment. Ann. Cal. Labor Code § 3602(d). 

Colorado: By statute, Colorado allows the leasing company to be considered a “coemployer” of a work site employer’s employee, provided the leasing company actually instructs the employees at the work site, it sets and actually pays the employee’s compensation, and retains the right to control the details of the employee’s work. C.R.S. § 870114(2). 

Connecticut: The Connecticut statute provides that the employer who originates a contract where an employee is loaned to another employer is ultimately responsible to the worker for all benefits. C.G.S.A. § 31292. Section 31284 provides:  

“... all rights and claims between an employer who complies with the requirements of Subsection (b) of this section and employees, or any representatives or dependents of such employees, arising out of personal injury or death sustained in the course of employment are abolished other than rights in claims given by this chapter ...” C.G.S.A. § 31284. 

Delaware: While there are no statutes or cases which directly determine the respective subrogation rights against an employee leasing company or its client, most likely, both are going to be afforded protection under the exclusive remedy rule. Porter v. Pathfinder Services, Inc., 683 A.2d 40 (Del. 1996).District of Columbia: The special employer is entitled to protection under the exclusive remedy provisions of the Workers’ Compensation Act, just as is the actual employer. Thomas v. Hycon, Inc., 244 F. Supp. 151 (D.C. 1965). 

Florida: Any employer who utilizes the services of an employee leasing service is entitled to immunity under the exclusive remedy rule. F.S.A. § 440.11(2). However, such immunity will only extend to an employer and to each employee of the employer who utilizes the services of the employees of a "help supply services company" as set forth in Standard Industry Code Industry Number 7363. 

Georgia: Employers are immune from suit under the exclusive remedy rule when utilizing employee leasing companies or temporary help agencies, provided that workers’ compensation benefits are provided to a worker by either the leasing employer or the employee leasing company. O.C.G.A. § 34911(c). 

Hawaii: Hawaii’s statutes do not address the issue. Although there are no cases directly interpreting employee leasing situations, the Hawaii Supreme Court has held that a temporary employer utilizing an employee from a temporary agency was entitled to the exclusive remedy protection because it had paid a fee to the temporary agency, which the court construed to include the cost of workers’ compensation insurance premiums. Frank v. Hawaii Planing Mill Foundation, 963 P.2d 349 (Haw. 1998). 

Idaho: Similar to Georgia, if either the employee leasing company or its client provides workers’ compensation coverage to the employee, both entities are protected under the exclusive remedy rule. Idaho Code § 72103. 

Illinois: Illinois’ statute provides that unless the employee leasing contract specifies otherwise, both the employee leasing company and the client employer are protected by the exclusive remedy rule. 215 I.L.C.S. § 113/45. 

Indiana: Indiana’s statute dictates that the employee leasing company is considered the employer of any employee leased to the client company. I.C. § 271691. The employee leasing company is known in Indiana as a Professional Employer Organization (PEO). A professional employer agreement must specify the allocation of the responsibility of obtaining workers’ compensation coverage to either the client or the PEO. I.C. § 271672. If this duty is met, a client and a PEO are both considered the employer of a covered employee for purposes of the exclusive remedy rule. I.C. § 271692. 

Iowa: Unless there is a contract of hire between the temporary employee company and the client company, the client company will not be considered an employer and is subject to a third-party action brought by the worker. However, when a contract of hire exists, the client company is considered the worker’s employer and is immune under the exclusive remedy rule. Fletcher v. Apache Hose & Belting Co., Inc., 519 N.W.2d 839 (Iowa App. 1994); Parsons v. Procter & Gamble Mfg. Co., 514 N.W.2d 891 (Iowa 1994); Swanson v. White Consolidated Industries, Inc., 77 F.3d 223 (8^th Cir. 1996). 

Kansas: Neither statute nor case law has decided whether or not an employee leasing company and the client company are considered employers for purposes of the exclusive remedy rule. However, if an employee becomes a borrowed servant, the special employer is immune to any third-party actions. Hollingsworth v. Fehrs Equipment Co., 729 P.2d 1214 (Kan. 1986). 

Kentucky: Under Kentucky law, the employee leasing company is considered the statutory employer of any leased employee. K.R.S. § 342.615. 

Louisiana: The employee leasing company and its client company are both considered employers and both are protected by the exclusive remedy rule. La. R.S. § 22:1210.56(C). 

Maine: Maine has a special statute dealing with employee leasing companies, located in Title 32, Chapter 125: Employee Leasing Companies. Provided either the employee leasing company or the client company secures workers’ compensation coverage, both entities are considered employers and immune from third-party suits under the exclusive remedy rule. Me. Rev. Stat. Ann. Tit. 32 § 14055(1). 

Maryland: Maryland case law holds that where there is an implied contract of hire between an employee provided by a temporary services agency and the client company, the client company is considered the employee’s special employer and is afforded protection under the exclusive remedy rule. Travelers Indemnity Co. v. Insurance Co. of North America, 519 A.2d 760 (Md. App. 1987). The employee is considered jointly employed by the temporary services agency and the client company. 

Massachusetts: It appears that Massachusetts allows an employee to sue a client company. Margolis v. Charles Precourt & Sons, Inc., No. 97-4029 (May 6, 1999) (unpublished); Home Ins. Co. v. Liberty Mutual Fire Ins. Co., 830 N.E.2d 186 (Mass. 2005). 

Michigan: The employee leasing company and its client company are both considered employers and immune from third-party actions under the exclusive remedy rule. Renfroe v. Higgins Rack Coating & Mfg. Co., 169 N.W.2d 326 (Mich. App. 1969). 

Minnesota: Minnesota deals with employee leasing situations in its Workers’ Compensation Statute. It provides that when an employee leasing company and a client company are engaged in a common enterprise, the injured worker may proceed against either the employer for benefits or the responsible third party for damages. M.S.A. § 176.061. 

Mississippi: The temporary employment agency and the client company are both considered employers and immune from third-party actions under the exclusive remedy rule. Northern Electric Co. v. Phillips, 660 So.2d 1278 (Miss. 1995). 

Missouri: When work is performed under a contract involving leasing or borrowing of an employee, and an injury occurs on or about the premises of the alleged statutory employer and the alleged statutory employee was doing work in the usual course of business of the alleged statutory employer, the worker is considered a statutory employee of the special employer and cannot be sued under the exclusive remedy rule. Wilson v. Altruk Freight Systems, Inc., 820 S.W.2d 717 (Mo. App. 1991). Employee leasing companies are not specifically dealt with in the Workers’ Compensation Act or in case law. 

Montana: An employee leasing company and its client company are both considered employers and immune from third-party actions under the exclusive remedy provision of the Workers’ Compensation Act. Mont. St. § 398207. 

Nebraska: An employee leasing company and its client company are both considered employers for purposes of the exclusive remedy rule, and are immune from third-party actions. Scwartz v. Riekes & Sons, 240 N.W.2d 581 (Neb. 1976). 

Nevada: Provided there is a written agreement between the employee leasing company and the client company, as well as meeting several other conditions set forth in the Nevada’s statute, an employee leasing company in compliance with the leasing provisions set forth in the Act is considered the employer for purposes of the Act. N.R.S. § 616B.691. 

New Hampshire: An employee leasing company must be certified by the insurance commissioner to meet certain criteria. If it does, it is considered the employer of the leased employee under the Employee Leasing Company Act. The employee leasing company and the client company are both entitled to protection under the exclusive remedy rule. N.H. Rev. Stat. Ann. § 277B:9 and 10. 

New Jersey: An employee leasing company must register with the State under the State’s statutes. If it does, the employee leasing company and the client company are both considered employers and immune from third-party actions under the exclusive remedy rule. N.J.S.A. § 34:872. 

New Mexico: If certain conditions are met, the employee leasing company and the client company are both considered to be employers and immune from third-party actions under the exclusive remedy rule. N.M.S.A. § 6013A5 (1978). 

New York: Neither the New York Workers’ Compensation Act nor case law directly addresses employee leasing. However, the issue is addressed by Rule 11G of the New York Workers’ Compensation and Employers Liability Manual. New York refers to the employee leasing company as the “labor contractor”, and refers to the client company as the “client”. Although it does not apply to temporary workers, Rule 11G provides that both parties must provide workers’ compensation coverage for the leased employee but does not specifically extend the exclusive remedy rule to the client company. 

North Carolina: Neither the North Carolina Workers’ Compensation Act nor case law directly addresses the exclusive remedy rule as applied to employee leasing situations. However, a court has held that a temporary employee could not pursue a third-party action against the employer to whom the worker was assigned. Brown v. Friday Services, Inc., 460 S.E.2d 356 (N.C. App. 1995). 

North Dakota: Both the employee leasing company and the client company are considered employers and immune from third-party actions when the two entities have secured the payment of compensation in accordance with North Dakota law. N.D.C.C. § 650108. 

Ohio: Neither the Ohio Workers’ Compensation Act nor case law directly addresses the issue. However, employee leasing and temporary employee situations are dealt with in the Bureau of Workers’ Compensation Rules. Ohio Adm. Code § 41231715. Workers provided by an employee leasing company are considered employees of the employee leasing company. An employee leasing company is referred to as a “Professional Employer Organization” or “PEO” in Ohio. There does not appear to be any cases clearly delineating whether or not the client company is entitled to protection under the exclusive remedy rule.  

Oklahoma: Neither the Oklahoma Workers’ Compensation Act nor case law directly addresses the exclusive remedy rule in connection with employee leasing situations. The Oklahoma Court of Appeals, however, has held that a worker assigned by a temporary agency to a client company is considered a loan servant, and that both employers are responsible for the provision of workers’ compensation, and therefore cannot be sued in a third-party action. Zant v. People Electric Cooperative, 900 P.2d 1008 (Okla. App. 1995). 

Oregon: The employee leasing company and the client company are both immune from third-party actions under the exclusive remedy rule, provided they comply with all of the provisions required under the Act. O.R.S. § 656.020 and O.R.S. § 656.850. 

Pennsylvania: Neither the Pennsylvania Workers’ Compensation Statute nor Pennsylvania case law sheds any light on the issue of whether or not an employee leasing company and the client company are entitled to protection under the exclusive remedy rule in Pennsylvania. The determination of who is the employer in leasing situations is addressed via common law factors involving which entity controls and directs the details of the work being performed by the employee. American Rock Mechanics, Inc. v. W.C.A.B. (Bik & Lehigh Concrete Technologies), 881 A.2d 54 (Pa. Commw. Ct. 2005). 

Rhode Island: Rhode Island case law has held that an employee leasing company remains the employer of a leased employee as long as the employer remains on the general employer’s payroll, but the employee leasing company and the client company are both considered employers for purposes of the exclusive remedy rule. Sorenson v. Colibri Corp., 650 A.2d 125 (R.I. 1994).South Carolina: Employee leasing companies and staff leasing services are governed by Section 406870 of the South Carolina Statutes. In order to be a statutory employee under the Workers’ Compensation Act, a worker must be engaged in an activity that “is a part of the client company’s trade, business, or occupation”. S.C. St. § 421400. This statutory requirement has been construed to include activities that: (1) are an important part of the employer’s trade or business of the employer; (2) are a necessary, essential, and integral part of the employer’s business; or (3) have previously been performed by employer’s employees. Glass v. Dow Chemical Co., 482 S.E.2d 49 (S.C. 1997). Only one of these tests must be met in order for a subcontractor’s employee to be considered a statutory employee of the owner and immune from third-party actions as a result of the exclusive remedy rule. Woodard v. Westvaco Corp., 433 S.E.2d 890 (S.C. App. 1993), vacated on other grounds, 460 S.E.2d 392 (1995). 

South Dakota: Neither the South Dakota Workers’ Compensation Act nor South Dakota case law shed any light on the issue involving the exclusive remedy rule and employee leasing companies. This issue, most likely, will be determined by applying common law factors to determine who is the employer, and who is the third party subject to suit. 

Tennessee: Tennessee has a specific statute dealing with employee leasing. Both the employee leasing company and the client company are entitled to the exclusive remedy protection based on a worker’s compensation policy secured by either entity. T.C.A. § 6243113. 

Texas: Texas enacted the Texas Staff Leasing Services Act, which addressed the use of leased employees and their employers in Texas. Texas Labor Code § 91.001, et seq. The Act codified the dual employment theory in Texas and held that in staff leasing situations, both the leasing company and the customer are considered employers. Most, if not all, efforts by the general employee’s workers’ compensation carrier to equitably subrogate or seek equitable contribution against the workers’ compensation carrier for the special employer ceased with this statute. Due to the theory of contribution being equitable in nature, the court considered the fact that it was contemplated by the parties that the leased staff would have their workers’ compensation premiums paid for by the general employer (the staff leasing company). The Staff Leasing Services Act, however, does not cover providers of temporary workers. The term “staff leasing services” within the Act does not include temporary help or a temporary common worker employer. The Staff Leasing Services Act applies to arrangements in which the employee’s assignment is intended to be longterm or continuing in nature, rather than temporary or seasonal in nature, and where a majority of the workforce at a client company work site is a specialized group within that workforce consisting of assigned employees of the license holder. Wingfoot Enter. v. Alvarado, 111 S.W.3d 134 (Tex. 2003). 

Utah: The employee leasing company and the client company in an employee leasing situation are both entitled to protection under the exclusive remedy provisions of the Utah Workers’ Compensation Act, provided the employee leasing arrangement meets the requirements of the Employee Leasing Company Licensing Act. U.C.A. § 34A2102(3)(a) and U.C.A. § 34A103(7)(e). 

Vermont: Both the leasing company and the client company are immune from third-party actions based on the exclusive remedy rule. Vt. Stat. Ann. Tit. 21, § 121037. 

Virginia: Both the employee leasing company and the client company are afforded protection by the exclusive remedy provisions of the Virginia Workers’ Compensation Act. Va. St. § 65.2803.1.6. 

Washington: Neither the Washington Workers’ Compensation Act nor case law directly give us guidance on employee leasing situations, and such questions will be answered by common law under Washington case decisions. 

West Virginia: Neither the West Virginia Workers’ Compensation Act nor case law give us direct answers to employee leasing situations. However, the 4^th Circuit has indicated that a worker assigned by a temporary agency is a loan servant and therefore was not entitled to bring a third-party action against the client company, who was considered to be a special employer. Maynard v. Keynard Chemical Co., 626 F.2d 359 (4^th Cir. 1980). 

Wisconsin: Section 102.29 provides that no employee of a temporary help agency who makes a claim for compensation may make a claim or maintain an action in tort against any employer who compensates the temporary agency for the employee’s services. Wis. Stat. § 102.29(6). Furthermore, no employee who is loaned by his or her employer to another employer and who makes a claim for workers’ compensation may make a claim or maintain an action in tort against the employer who accepted the loaned employee’s services. Wis. Stat. § 102.29(7). 

Wyoming: The Wyoming Workers’ Compensation Act defines a temporary service contractor as an entity that employs individuals directly for the purpose of furnishing services of the employed individuals on a temporary basis to others. Wy. St. § 2714102(a). The Act also designates that the employer is considered to be the entity utilizing the services of a worker furnished by another, except in the instance of a temporary service contractor. Wy. St. § 2714102(a). The entity considered the employer is immune from third-party actions by virtue of the exclusive remedy provisions of the Act. 

In most states, an injured employee cannot sue a co-employee, absent certain exceptional circumstances such as gross negligence or an intentional act. So, when an employee is injured due to the negligence of a leased employee, whether the leased employee is a co-employee becomes a matter of paramount importance. States are littered with exceptions and nuanced approaches to the entire concept of exclusive remedy protection for a PEO. Therefore, in any case involving a PEO, it is usually recommended to consult with subrogation counsel regarding the ability to reimburse the carrier's lien or obtain a future credit.  

It is important for subrogation professionals to familiarize themselves with the lay of the land when evaluating subrogation potential in employee leasing situations, regardless of which state you are subrogating in. Knowing who can be sued and when is extremely critical in evaluating your recovery chances and performing the necessary due diligence and investigation necessary to preserve your rights to bring a third-party action and recoup your claim payments. For additional questions involving employee leasing or temporary employment scenarios, please contact Gary Wickert at gwickert@mwllaw.com.  

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