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The Employer/Employee Relationship in Workers Compensation

November 2000

In these changing business times, it is often difficult to discern who the real employer is with regard to the employer/employee relationship. The traditional employer/employee relationship is being eroded as employers turn to temporary agency workers, independent contractors, and leased employees to enhance their competitive advantage. This article explains the common-law method of defining the employer/employee relationship and provides cost saving tips for risk management.

by Jim Pocius
Marshall, Dennehey, Warner, Coleman & Goggin

It is a basic fact that an employer or institution does not have to pay workers compensation if the person injured is not an employee. In these changing business times, it is sometimes very difficult to discern who the real employer is with regard to the employer/employee relationship. Business has to be more flexible in our global economy and, as a result, the traditional employer/employee relationship is being eroded.

This relationship, in the past, had a very simple definition. In the traditional employer/employee relationship, an employer hired, supervised, and paid the employee. In today's business world, this traditional relationship is being replaced to meet flexible labor needs. Employers are beginning to use temporary agency workers, independent contractors, and leased employees to enhance their competitive advantage. By doing so, however, employers risk increasing their workers compensation liability.

Defining the Employer/Employee Relationship

Initially, 35 states use the common-law method of defining the employer/employee relationship. Some of the factors that courts have used to determine this relationship are as follows:

  1. The person in the general employ of another can be transferred to another employer and become the employee of the second employer.
  2. Whether or not the transferred employee becomes the employee of the second employer depends on whether the first employer passes to the second employer not only the right to control the employee's work, but also their manner of performing it.
  3. It is enough to establish the employer/employee relationship if the employer has the right to control the employee's manner of performance of work regardless of whether the right is ever exercised.
  4. Facts which indicate that an employee remains in the original employer's service include the following.
  • The original employer's right to select the employee to be loaned and to discharge that person at any time and send another person in his place.
  • The loaned employee's possession of a skill or special training required by the work for the second employer and employment at a daily or hourly rate for no definite period.

As can be seen by these factors, the common-law test for an employer/employee relationship is one of balance. A court looks at all of the factors as established by the facts of the case and then makes a value judgment as to whether or not an employer/employee relationship exists.

Consider this example: Acme Company hires an employee from Beta Temporary Employer Service. The Acme Company supervises the employee and directs his daily work. Further, Acme has the right to send the worker back to Beta Temporary Agency if that worker is not doing a good job. The employee is paid by Beta Agency.

Under these facts, most employers would think they have no workers compensation liabilities since they hired a "temp" from Beta Agency. Unfortunately, that is not the case. Without a contract clearly designating the responsibilities of the parties, the court would rely on common law. Under the factors I have previously mentioned, most courts would determine that the worker is an employee of Acme Company. In this type of situation, it is very difficult for an employer because usually that employer does not have workers compensation insurance for the borrowed employee.

Independent Contractors

In an effort to avoid an employer/employee relationship, some businesses are hiring independent contractors. Again, the test for an independent contractor as opposed to an employer/employee relationship is one of common law. The courts look at the following factors.

  • Control of the manner in which work is to be done
  • Responsibility for result only
  • Terms of agreement between the parties
  • The nature of the workers occupation
  • The skill required for performance
  • Whether one employee is engaged in a distinct occupation or business
  • Which party supplies the tools
  • Whether payment is by time or by the job
  • Whether the work is part of the regular business of the employer and the right of the employer to terminate the employment at any time. [Hammermill Paper Company v Rust Engineering, 243 A2d 389 (1968)

Courts across the country have indicated that these factors are part of a balancing or weighing test. The relationship will be determined by the facts of each case. For instance, Acme Company, which produces widgets, hires a plumber to repair a leaking water pipe. The plumber has done the job for a set amount, and Acme Company does not supervise the plumber's work. The plumber is not paid by the hour and receives no benefits from Acme Company.

In this situation, it is clear that the plumber is an independent contractor. While he is paid by Acme Company, he is not there as part of their regular business. In addition, he has a special skill and supplies his own tools. Further, he receives no healthcare or retirement benefits from Acme Company and does not receive a W-2 Form.

If an employer exercises more control or uses a different method of payment, an independent contractor can suddenly become an employee. This is a situation most employers would want to avoid.

Professional Employer Organization (PEO)

The third change to the employer/employee relationship occurs with professional employer organizations. A professional employer organization or PEO is an organization that leases employees to an employer in a long-term relationship.

Florida statute defines "employee leasing" as, "an arrangement whereby, a leasing company assigns its employees to a client and allocates the direction of and control over the leased employees between leasing companies and a client." The professional employer organization is different from a temporary agency. The relationship with a PEO is a contractual relationship between the leasing company and its client company.

The contracts vary widely, but the PEO usually assumes the responsibility of an employer for specific purposes only on a long-term basis. The specific purposes must be defined in a contract. The contracts are not standard. Some allow retroactive cancellation, some include indemnification and hold harmless clauses in favor of the PEO and specifically indicate that the business owner is the responsible party for discrimination type claims. In most cases, the client company remains in charge of the daily operations and remains charged with the implementation of work place safety or daily employment issues.

In the 15 states that are considering or have allowed PEOs, Florida can be used as a model. In Florida, professional PEO's have been very successful.

The right of direction and control is usually found in the agreement for services contract between the client and the PEO. In Florida, the term "co-employment" best fits the situation. The responsibilities are shared between the client and the PEO with the PEO taking the "administrative employer role," and the client remaining in charge of the product or service of the client company. This relationship, once defined by statute, eliminates many of the problems inherent in determining who the correct employer is. Both the PEO and the client are considered the employer.

However, both the federal government and the other 35 states are still operating under the common-law rules. Under Florida regulation (468.529), the PEO is responsible for the payment of wages and taxes, including state unemployment tax. There was also a federal court ruling, USA v IMRC Garami, indicating that a business owner may remain responsible if it is determined to be the actual employer of the leased workers with regard to federal taxes and penalties if the taxes are not remitted properly. This case shows that the federal government is still operating based on the common law tests of who controls the employee.

As previously noted, 15 states recognize PEOs. Some require registration; some do not. Florida is the only state that grants potential immunity to a PEO if it obtains workers compensation coverage. As such, no client can rely on transferring liability for its workers compensation problems by using a PEO.

Summary

In summary, the employer/employee relationship is ever changing in today's business world. Employers must be careful to determine who their employees are. If temporary employees are going to be used, it is incumbent on the employer, in most states, to abstain from controlling the temporary employees as much as possible. Otherwise, workers that the employer thought were independent contractors or employees of a temporary agency could become their own borrowed employees.

The following are some cost-saving tips for risk management with regard to the employer/employee relationship.

  • When in doubt, have a written contract designating the responsibilities of the parties.
  • If dealing with any temporary agency, make sure that temporary agency has a workers compensation policy that covers the employee that is coming to your facility.
  • If using a PEO, make sure to investigate thoroughly its legitimacy. Further, attempt to obtain an indemnity agreement holding the employer harmless or indemnifying the employer for any workers compensation injuries suffered by the employees of the PEO.

Always keep the common-law rules in mind. The one overriding factor in the common law is control of the employee. The less control exerted by the alleged employer, the greater the chance the worker will not be considered an employee.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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