RISK PROBLEMS/SOLUTIONS

WORKERS COMPENSATION
FOR LABOR CONTRACTORS

By LeRoy Utschig, CPCU, CLU, ARM

The use of a labor contractor to handle part or all of the labor needs of a business is a relatively new concept. When the services of a labor contractor are used, several workers compensation issues need to be addressed.

While there can be many subtleties involving labor contractors, the basic concept works like this: A labor contractor has workers and takes care of personnel issues, payroll administration, and the issuing of paychecks. Most of the labor contractor's employees are working on a full-time basis at other firms who have hired the labor contractor for their services. Businesses hiring workers from a labor contractor are referred to as clients. Labor contractor employees are working full time at a client who has hired the labor contractor.

This discussion does not apply to temporary help workers. A temporary worker is a worker furnished to an entity to substitute for a permanent employee on leave or to meet seasonal or short-term workload conditions.

There are times when a client "fires" all of its employees and hires them back through a labor contractor. For the workers, the only change would be the paycheck showing the labor contractor's name. Individual workers might not know about the existence of the labor contractor arrangement unless they look very closely at their paycheck.

Labor contractor illustration

Illinois has higher workers compensation rates than Indiana. An Illinois processing client had a workers compensation experience modification of 1.45. To reduce his workers compensation insurance costs, he "fired" all of his employees and hired them back via an Indiana labor contractor. Unless they noticed a change in what was imprinted on their paychecks, the processing client workers were not even aware of the change. Work directions, the work they did, training, and being told what time to report to work were all done by the processing client.

The Indiana-based labor contractor was covering the processing client's employee for workers compensation by insuring them using Indiana rates and without applying any experience modification. Workers compensation costs were part of the charges billed to the processing client by the labor contractor. The processing client, by using the labor contractor, significantly lowered its labor costs due to the reduced workers compensation premiums.

Because the labor contractor's employees were working in Illinois on a full-time basis, most probably these workers would receive Illinois workers compensation benefits. Whether or not they would receive Illinois benefits would be determined by the Illinois workers compensation authorities. The processing client's work history developed a 1.45 experience modification of Illinois rates. However, the labor contractor was insuring the exposure using much lower Indiana rates without applying any experience modification. The premium being charged for the workers compensation exposure was too low.

As situations such as this have developed, the workers compensation regulatory authorities have recognized the need to step in. There are a number of different ways to treat the workers compensation exposure when any client hires employees through a labor contractor. No one set of rules and endorsements applies to all states. Each state has its own rules governing the situation.

The National Council on Compensation Insurance (NCCI) Workers Compensation Rate Manual gives the policy issuing rules for most states. The manual includes the loss costs for each classification in a given state and state exception pages. The state exception pages provide rules governing how to insure the employees of a labor contractor.

Labor contractor endorsements

There are four endorsements commonly involved with labor contractor situations.

* Labor Contractor Endorsement, Form WC 000320A 0292.

* Labor Contractor Exclusion Endorsement, Form WC 000321 0292.

* Employee Leasing Client Exclusion Endorsement, Form WC 000322 0292.

* Multiple Coordinated Policy Endorsement, Form WC 000323 0292.

Which one(s), if any, of the above endorsements to use will be dictated, in part, by the workers compensation regulations in the state where the long-term work is being done. Whether any or all of these endorsements is available for use in your state can be found in the workers compensation manual's state exception pages for your state.

These are the only endorsements that I am aware of which a business can use to exclude employees from its workers compensation policy. Conversely, these endorsements can be used to provide workers compensation coverage for workers not on the business' payroll. Both the labor contractor and the client can either cover or exclude the leased employees.

Workers compensation insurance will always be in force for the labor contractor's employees, but there will not be two workers compensation policies covering an injured labor contractor employee. What is not certain is whether the labor contractor's employees will be insured by the labor contractor or the client leasing the labor contractor's employees.

Labor Contractor Endorsement,
Form WC 000320A 0292

This endorsement can apply to all of the work being done for a client or for the work done under a contract or project. It would be attached to the client's workers compensation policy. Here is some of the salient wording from Form WC 000320A:

This endorsement applies only with respect to bodily injury to your leased employees in the state named in Item 2 of the Schedule when provided by a labor contractor named in Item 1 of the Schedule...

Part One (workers compensation insurance) and Part Two (employers liability insurance) will apply as though the labor contractor is an insured...

Under Part One we will reimburse the labor contractor named in the Schedule for the benefits required by the workers compensation law if we are not permitted to pay the benefits directly to the persons entitled to them.

Labor Contractor Exclusion Endorsement,
Form WC 000321 0292

This endorsement would be attached to a labor contractor's workers compensation policy. Essentially, it states that the workers compensation contract for the labor contractor will not cover any employee leased to a client. Here is the key wording:

This endorsement applies only with respect to workers provided by you to a client under an employee leasing arrangement to engage in work for the client. Your policy does not provide coverage for workers you lease to the clients listed above.

Form WC 000323 0292,
Multiple Coordinated
Policy Endorsement

This endorsement would be attached to a client's workers compensation policy. It restricts coverage to only those workers hired from the labor contractor(s) listed on the endorsement. Here is the applicable wording:

The multiple coordinated policy to which this endorsement is attached provides coverage for the workers you lease from the labor contractor listed above and does not provide coverage for any other workers, leased or non-leased.

Form WC 000322 0292,
Employee Leasing Client
Exclusion Endorsement

This endorsement would be attached to a client's workers compensation policy and excludes coverage for leased employees. This is the important part of this endorsement:

This endorsement applies only with respect to your leased workers engaged in any work provided under an employee leasing arrangement. Your policy does not provide coverage for workers you lease from labor contractors listed above.

A common way for an agent to learn that a client is using a labor contractor arrangement is when the client calls the agency to cancel all workers compensation coverage. Some clients will say they have no need for any workers compensation coverage. They are using a labor contractor to lease their employees and the labor contractor is providing the workers compensation.

However, there are several reasons why a client might want to have a workers compensation policy in force even though a labor contractor is providing workers compensation coverage for leased employees:

1) Not all employees are covered by the leasing arrangement. There will be times when the factory workers will be leased but the administrative staff will still be direct employees. The client definitely needs workers compensation in this type of an arrangement.

2) There are times when everyone, except the owners, are covered by the labor contractor's workers compensation contract. It is possible that the partners of a partnership, the officers of a corporation, an individual owner, or the members or managers of a limited liability company are not part of the labor contractor's arrangement and will desire workers compensation.

3) Casual employees and uncovered people of a hired subcontractor also may need to be covered by the client's own workers compensation contract. An example is a client located in an industrial park. They have stones and railroad ties lining the various flower beds on the side of the plant facing the street. To the rear of the plant they have created a small park. They have swing sets, a ball field and a park-type shelter for the picnic tables. During the summer months, they hire the daughter of one of their plant employees to take care of the flowers and mow the grass. She is hired direct and gets hurt while doing the landscaping work. The client needs a workers compensation policy to cover this exposure.

4) Another example is hiring a trade contractor, such as a carpenter or electrician. If the trade contractor is operating as an individual proprietorship or a partnership, it is possible that there is no coverage for the individual owner or partner. In the absence of the sub-contractor's having its own workers compensation coverage, it receives workers compensation coverage from the client(s) who hire them. Again, this is another example of why a client may desire to have workers compensation even though they are using a labor contractor who is furnishing workers compensation.

If a client refuses to buy a workers compensation contract because it has a labor contractor arrangement, my recommendation is that the insurance agent's or insurer's file be documented to show that it was recommended that they still maintain their own workers compensation coverage.

For the situations where a business has leased employees who are covered by the labor contractor's workers compensation policy, consider adding Endorsement WC 000322, Employee Leasing Client Exclusion Endorsement. This endorsement would eliminate any possibility of the client's workers compensation covering leased employees. However, there would be coverage for direct employees.

Summary

* Leased employees work on a permanent basis for a client.

* Each state decides whether the leased employees are covered by the labor contractor's or client's workers compensation policy.

* The Employee Leasing Client Exclusion Endorsement is added to the client's workers compensation policy and excludes any coverage for leased employees. When using this endorsement, there is still coverage for the client's direct employees.

* By adding the Multiple Coordinated Policy Endorsement to its policy, the client can provide workers compensation coverage to employees leased from the specified labor contractor(s). There is no coverage for employees leased from a labor contractor(s) not listed in the endorsement.

* A Labor Contractor Exclusion Endorsement can be added to the labor contractor's workers endorsement excluding workers compensation coverage for the labor contractor's employees who are leased to the client(s) listed in the endorsement.

* A client can add the labor contractor endorsement to its workers compensation contract. Covering leased workers under the client's workers compensation contract is the intention of the form. With this endorsement, the client's policy will either make payments directly to the leased employees or reimburse the labor contractor for injuries sustained by the leased employees.

* A typical client will need to have its own workers compensation policy even if the labor contractor is providing the workers compensation coverage for leased employees. Coverage is needed if:

--Not all of the client's employees, including officers, are leased.

--The client occasionally directly hires an employee.

--An independent contractor is hired who either does not have a workers compensation contract or the independent contractor's policy is not covering partners or individual proprietors. *