Dangers of Leased Employees, Volunteers, and Independent Contractors

Slow economic recovery, inflationary pressure, socio-economic condition and increased employee law or regulation has resulted in employers shifting from staff employees to outsourcing, leased employees, volunteers, or independent contractors.

Positives:

A few positives for using this of type employee resource are tax savings, better control over employee benefits, limited payroll, reduced employee-employer relations, and reduction of workers compensation premiums.

There can be more efficient production as employees are used as needed and the employment can be concluded at the end of any specific task or time frame. And in most instances, all monies paid to the independent contractor or the employee leasing organization may be fully deductible as business expense. Since volunteers are free, no cost is incurred.

Outsourcing is probably the safest method. Most times the work or product is done off premises, and direction and control of employees is at the hand of the person or organization doing the task. The organization doing the outsourcing also generally recruits the necessary employees. All employment needs are under the outsourcer’s direction, control and cost. While the outsourcing company can bill the client for these costs, there is little chance that the client company can become exposed to a worker’s compensation loss. Contracts with hold harmless clauses and workers compensation coverage endorsement certificates are usually standard contract provisions.

Uses for outside employees are usually done by a defined written contract.

Negatives:

It is easy to violate or misconstrue instances that might make the independent contractor, volunteer, or the leased employee a statutory employee. Rules, regulations, judicial decisions, and state laws control the interpretation as to what constitutes the basis for statutory employment. These vary from state to state, and they must be reviewed by legal counsel in order to prepare policies and procedures to avoid statutory employment pitfalls.

• Some items to address are:
  • Minimum of direction and control policy by the hiring entity.
  • Services provided be maximized for being outside the usual course of business by the hiring entity.
  • Time elements should be restricted to federal and state standards.
  • Should Professional Employer Organizations be used? Steps for getting the right organization.
  • Have all contracts designed to maximize protection for the hiring entity. These should cover:
    • Hold harmless clauses.
    • Certificates of Insurance for Workers Compensation and General Liability Insurance.
    • Policies naming the hiring entity as an also insured.
    • Compliance with IRS, Department of Labor, and other Federal or State agencies that have definitions or programs that might create an unexpected employment situation.
    • Contracts that require the supplying agency to defend, protect and reimburse against any liability claims brought their employees.
    • Developing methods to protect the hiring entity against financial or processing failure of the supplying entity.
    • Recourses when the providing entity fails to supply properly trained employees.
    • Necessary definitions for the employee, independent contractor, and volunteer.
    • Procedures to monitor and make corrections in operation when legal changes occur.

If a Claim is presented:

No program can be established to cover every contingency. Therefore, supplemental provisions are needed to cover the investigation for any claimant’s assertion that might cause employment exposures.

The company needs to implement and investigation procedure, evaluation assessment, and disposition procedure. If litigation is determined to be the plan of choice, how far should it go?

The workers compensation claim technicians, and defense counsel may not be sufficiently experienced enough to address this type of loss. The use of specialized investigators and labor orientated legal counsel is strongly recommended.

Policy Audits for Premium Adjustment:

All workers compensation underwriters have allowance for retro-active premium adjustment. Should an employer loose a claim due to the use of a leased employee, a volunteer, or an independent contractor, the insurance carrier will be obliged to pay the loss. This can result in a premium audit for increases that may go back to cover the entire period such programs were in use.

Therefore, when considering use of outside employment sources bring your insurance carrier into the discussion. What are their requirements? How does state premium regulation apply? What are rights of the employer and the insurance carrier?

Summary:

Using leased employees, volunteers, or independent contractors is an excellent money saving device. It also may increase productivity and efficiency. However, there are dangers and consequences if improper implementation and use procedures do not meet the required high standards this practice demands.

Author Michael Stack, Principal, COMPClub, Amaxx LLC. He is an expert in workers compensation cost containment systems and helps employers reduce their work comp costs by 20% to 50%. He works as a consultant to large and mid-market clients, is co-author of Your Ultimate Guide To Mastering Workers Comp Costs, a comprehensive step-by-step manual of cost containment strategies based on hands-on field experience, and is founder of COMPClub, an exclusive member training program on workers compensation cost containment best practices. Through these platforms he is in the trenches on a working together with clients to implement and define best practices, which allows him to continuously be at the forefront of innovation and thought leadership in workers’ compensation cost containment. Contact: mstack@reduceyourworkerscomp.com.

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Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional.