With the economy continuing to hum along, and companies facing backlogs due to a tight labor pool, more Massachusetts employers are looking to lease employees to adequately staff projects, jobsites, and accounts – and substitute their own traditional workforce. Companies see numerous benefits to such leasing arrangements, including cost-saving measures related to personnel functions; better health, pension, and other employee benefits; and administrative functions that the company may be unable to perform in-house.
When a company leases all or part of its work force from a professional employer organization (“PEO”) or “employee leasing company”, and one of the “leased employees” is injured on the job, does the Workers’ Compensation Act, Massachusetts G.L. c. 152 (the “WCA”), provide the defendant company immunity from tort liability? Alternatively, how can a lessee company shield itself from liability in these situations?
Employee lessees, also called “client companies”, must overcome several hurdles to successfully claim immunity under the WCA. Massachusetts courts have held that an employer is immune from tort liability under the WCA only if it (a) has a direct employment relationship with the worker and (b) is “an insured person liable for the payment of the employee’s workers’ compensation.”
As discussed below, if you are using leased employees, it is critical that you consult with counsel to review your contracts with PEOs and understand the factors courts consider when evaluating the applicability of the WCA’s immunity protection for employers.
The concept of immunity for insured employers is straightforward in the context of a traditional employer-employee relationship. The WCA requires that every employer purchase workers’ compensation insurance, unless the employer is qualified to be self-insured or is a member of a self-insurance group. G.L. c. 152, § 25A. The WCA provides the exclusive remedy for an employee’s tort claims if an employer can show that (1) the plaintiff was its employee; (2) her condition was a “personal injury” as defined by the WCA; and (3) the injury arose “out of and in the course of . . . employment.”
The purpose of this remedial mechanism is to “provide a benefit to the insured employer by releasing it from liability in return for imposing a statutory liability without regard to fault.” Gurry v. Cumberland Farms, Inc., 406 Mass. 615, 621 (1990). An employer is required to report an employee’s injury or claim for compensation, and the insurer is required to respond by paying or denying that claim. G.L. c. 152 § 7.
Liability for worker injuries is more complicated, however, when a company leases employees from a PEO. It can result in a “double jeopardy” situation, in which leased employees can obtain both workers’ compensation from an employer-paid workers’ compensation policy and retain the right to bring a tort claim against the same employer.
In the event a leased worker is injured, what factors control whether the employer is immune from any subsequent claim brought by the injured worker?
The Two-Pronged Test For Evaluating WCA Immunity
Courts apply a two-pronged test to determine whether the WCA provides an employer immunity from its employee’s tort claims. The first prong looks to several factors to establish whether a “direct employment relationship” exists. The second prong evaluates whether the employer is an “insured person liable for the payment of compensation.” See Fleming v. Shaheen Bros., Inc., 71 Mass.App.Ct. 223, 228 (2008).
a. The “Direct Employment Relationship” Test
Massachusetts courts consider several factors when determining whether a defendant employer and leased employee have a direct employment relationship. While none of the factors are dispositive, the more undisputed factors that can be established, the stronger the chances of succeeding on asking the court to dismiss the case before trial. These factors include:
- Did the defendant independently interview and hire the plaintiff?
- Does the defendant control the plaintiff’s hours, training, and schedule?
- Does the defendant supervise the plaintiff?
- Does the defendant have the exclusive right to control the plaintiff’s work?
- Does the defendant directly or indirectly pay the plaintiff’s wages and workers’ compensation benefits?
- Does the plaintiff have any dealings with the PEO, or is she interacting exclusively with the leasing company as her employer?
- Is there an implied employment contract between the plaintiff and the PEO? Assuming enough of the above factors are undisputed, courts will then look to the second prong.
b. The “Responsibility for Payment of Workers’ Compensation” Test
The second prong of the immunity test looks to whether the defendant is liable for the plaintiff’s workers’ compensation. Here, the courts look to whether the defendant is responsible for paying the workers’ compensation premium, how such payment is made, and what the contract says about such payments. Notably, “[t]he employer need not actually pay the insurance premiums to benefit from the workers’ compensation exclusivity bar.” Lang v. Edward J. Lamothe Co., 20 Mass.App.Ct. 231, 232 (1985). That is, the employer is not literally required to issue a check to the workers’ compensation insurance carrier.
What matters for purposes of meeting the second prong of the test is whether the employer specifically earmarked specific amounts to pay for the workers’ compensation premiums. “Global” payments to the PEO that include unallocated amounts to generally cover administrative costs (even where some of those costs include workers’ compensation premiums), will likely fail the second prong of the test.
Best Practices and Risk Management
Companies using leased employees should insist on contractual language with PEOs that explicitly states the client company is paying the workers’ compensation premium and expressly allocates a dollar amount to cover those premiums. Additionally, the parties’ contract (and conduct) should reflect as many of the above direct employment factors, particularly exclusive responsibility for hiring, supervising, and terminating the employee.
In reality, not all of the factors will be present—many PEOs will provide general safety training and drug screening to employees, for example. Nevertheless, best practices to maximize the chance of preserving the WCA’s employer tort immunity weigh heavily in favor of companies controlling leased employees as they would their traditional employees. If enough of the factors are there—and an employer can show it paid the workers’ compensation premium, there is a good chance the WCA’s immunity provision will bar the plaintiff’s tort claims in the event of an accident.
Nathan Cole is a Director at Kenney & Sams and has been representing small businesses, construction contractors, subcontractors, and homeowners in Massachusetts for over a decade.