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The Risky Business Of Long-Term Temporary Employees

Presented by The Journal of Workers CompensationUsing temporary employees provides employers with flexibility, reduces their long-term investment in individual employees, and gives them the option of reducing staff size without affecting “permanent” employee rolls. For years, companies have used temporary employees as convenient and economical ways to meet last-minute and short-term staffing crunches.

But in the 1990s, the placement of temporary employees has taken on a different look. Increasingly, companies are placing temporary employees in long-term positions, making them indistinguishable from regular employees except for the fact that they are not receiving benefits (e.g., paid vacation time, group health insurance). But rather than being able to enjoy the wind-fall, companies are finding themselves at risk for being sued by these long-term temporary employees — both for the employee benefits they are not receiving as well as work-related injuries.

Some Terminology

Traditionally, the company accepting temporary employees has been called the “client company, “ and the company placing them, the “leasing company.” Temporary employees are different from “leased employees,” however, and their distinction matters for purposes of workers compensation coverage.

To the client company, the temporary workers or “temps” are usually considered independent contractors. To the leasing company, they are actual employees. This demarcation is typically evidenced by the leasing company’s being the one to receive the temps’ time sheets and cut their paychecks. When the placement is for a few days, a few weeks, or even a few months, this demarcation seems clear to everyone.

But what happens when the placement occurs for more than a few months? Can long-term temporary workers still be treated by the client company as independent contractors, or do they become permanent employees? A high-profile case involving Microsoft has given us reason to worry.

Employee Benefits for Temps

In May 1999, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit decided that long-term temps at Microsoft could join a class action lawsuit against the software mega-company. The class action had been started by independent contractors at Microsoft after the Internal Revenue Service (IRS) decided in 1990 that Microsoft had improperly classified these workers as independent contractors rather than permanent employees.

While the ruling may seem like legal quibbling, the fact that the long-term temps are joining the class action means that Microsoft will be facing more than 6,000 plaintiffs — rather than just a few hundred — in a battle for past and future benefits. And those benefits aren’t just any benefits; they include a valuable option for purchasing Microsoft’s stock.

In making its ruling, the panel of the Ninth Circuit reasoned that the long-term temps were es-sentially independent contractors by another name. Like the independent contractors, the long-term temps could argue that they were “common-law employees” — “not officially married to the company, but living with it and entitled to the same benefits permanent staffers get,” in the words of Business Week’s coverage of the case.1 As common-law employees, the long-term temps may have been technically employed by the leasing company, but by virtue of Microsoft’s control over them on the job, they became permanent employees of Microsoft as well.

A critical question for other client companies is this: Do you exercise day-to-day control over your long-term temps? If the answer is yes, then be prepared to be taken to court in order to treat them as permanent employees. This means extending to long-term temps whatever benefits you offer your permanent employees. What does this mean, if anything, for workers compensation coverage?

Workers Compensation Coverage

It is fairly easy for a client company to include temporary employees in its workers compensation policy. The names and relevant data of the temps are submitted to the insurer as extra persons affecting payroll and the risk modification rating. It is easy to classify these individuals as additional employees in the general type of work done by the client company.

If the leasing company carries the workers compensation coverage, it has a more difficult time assigning the proper job classifications for the temporary employees. The leasing company must track the placements, the type of work being done, the risk history of the client company or companies, and whatever else is relevant to the risks that the temps face on the job. The more mobile the temporary employees, the harder it is for the leasing company to do this. However, this is not an effort that typically goes unrewarded — the leasing company recoups not only the premiums, but also its overhead costs when it charges the client company for the temps.

Who procures the workers compensation coverage can have significant consequences for who has protection from being sued when a temporary employee is injured on the job. The general rule is that the employer who procures the coverage as to that employee cannot be sued. (We will ignore the technical exceptions to this general rule for purposes of this discussion.)

A Hypothetical Situation

A leasing company sends a temporary employee to a client company for a term of work that will continue so long as the temp performs well and the client company has enough business to keep all of its employees (permanent and temporary) busy. The client company provides all of the work materials. It trains and supervises the temporary employee. It controls the temp’s hours and days of work. It periodically evaluates the temp’s performance, and good performance reviews result in increases in pay.

Each week, the temp fills out a timesheet provided by the leasing company. The temp has the timesheet countersigned by a supervisor at the client company and then submits the timesheet to the leasing company. The leasing company issues a paycheck to the temp for each week a timesheet is submitted. The leasing company deducts all of the appropriate federal and state withholdings and pays the necessary payroll taxes.

One day at the work site, a co-employee negligently creates a hazardous situation by leaving work-related tools in a dangerous place. The temporary employee is injured on the job. Who can the temp sue, if anybody?

Independent Contractor or Employee

Our first step is to determine whether the temp was actually a permanent employee of the client company, the leasing company, or both. The IRS has a list of approximately 20 questions that it uses to evaluate whether a worker is an independent contractor or an employee. (The IRS is interested in the answer because it is more likely to receive payroll taxes and withholdings from employers than income taxes from independent contractors.) State statutes and court decisions also offer criteria to evaluate whether an independent contractor is really an employee in disguise. In general, what these criteria focus on is whether the purported employer has control over the worker and the method of completing the job or just the end product. For instance, an employer — as opposed to a company contracting with an independent contractor — is more likely to:

  • provide the work materials and tools necessary to do the job (computers, pens, paper, desk, phone, and so on, depending on the nature of the job);
  • set the hours and days of work;
  • monitor the person’s ongoing work product rather than just the final result;
  • pay by the week or some other interval rather than by the job; and
  • issue the paycheck and withhold taxes from pay.

In our hypothetical situation, both the leasing company and the client company have some of the characteristics of an employer. The determination of who is the employer will ultimately be a fact-based decision by the court assigned to hear the temp’s lawsuit. The leasing company, the client company, or both can end up being considered the employer.

Who Bought the Workers Compensation Coverage?

Determining who is the employer does not end the matter. Courts also look at who is providing workers compensation coverage for the temp. If the temp is being used by the client company for a long enough period of time and the client company includes the temp on its workers compensation policy, the client company will typically be immune from any lawsuit for work-related injuries. If the leasing company forewent purchasing coverage as a result of the client company’s actions, the leasing company would be the one vulnerable to suit.

“What suit?” you might wonder. Didn’t the injury happen on the client company’s property and as result of the client company’s employee? Yes, but if the client company has had chronic problems in maintaining a safe workplace — such that the leasing company knew or should have known about them — the temporary employee would have a basis for suing the leasing company for placing him or her in a hazardous work environment.

If the leasing company provides the workers compensation coverage, the employee may be able to sue the client company for the workplace injury. A court would investigate whether the particular state’s exclusive remedy rule applies to the client company. The exclusive remedy rule provides immunity from employee lawsuits for work-related injuries or illnesses — typically for those employers who procure workers compensation coverage for the injured or ill employees.

In our example, we still have a question about whether the leasing company or the client company is the employer. In long-term placement situations, the probability increases that the client company would be deemed the actual employer. However, if the leasing company procures the workers compensation coverage, the client company will most likely not meet the state’s requirements for exclusive remedy protection.

This result may seem unfair. Even if the leasing company is the one procuring the workers compensation coverage, is there any doubt that the cost of the premiums and overhead expenses in managing the coverage is being passed on to the client company? Of course not. Thus, the leasing company would more properly be considered an agent of the client company for purposes of obtaining the mandated workers compensation coverage. Furthermore, in paying this cost to the leasing company, the client company is probably lulled into a false sense of security that it has met any obligations for providing the temporary employee with workers compensation coverage. In other words, the client company is ready to be blind-sided by a lawsuit.

Know Your State

It is important to investigate and determine how your state would handle this hypothetical situation. Some states provide by case law or statute that workers compensation will be the exclusive remedy for work-related injuries and illnesses only for those employers that actually procure the workers compensation coverage. Thus, in the situation where the client company doesn’t purchase coverage because it knows the coverage is being provided for by the leasing company, the client company would not be protected from suit.

This vulnerability may still exist even if the client company and leasing company enter into a contract where the leasing company assumes the burden of providing coverage in exchange for the client company’s paying a higher fee to the leasing company. Other states might provide otherwise. See Frank v. Hawaii Planing Mill Foundation, 963 P.2d 349 (Hawaii 1998). Without an express agreement, however, it is difficult to imagine any court in any state finding that the client company is immune from suit.

Multiple States, Multiple Headaches

Our hypothetical would become even more complicated if the client company had engaged the temporary employee with assignments in various states. For example, if the leasing company had placed the temporary employee with the client company in state A, and the temporary employee worked for six months at a site in state A, then one year at a site in state B, and then three months in state C, the exposure of both the leasing company and the client company would increase every time the employee was relocated.

For example, a worker injured in state C may have the option of filing a workers compensation claim in state A or C. The worker will usually choose the state that provides the best workers compensation benefits. However, the worker may also choose the state in which the exclusive remedy rule doesn’t apply — as to the leasing company, the client company, or both (e.g., the leasing company’s coverage may not apply in state C, state A may permit lawsuits for a co-employee’s negligence). A savvy plaintiff’s attorney will make the most of a temporary employee’s options for who to sue, who to file a workers compensation claim against, and in which state to do these things.

Tread Carefully

With the hypothetical situation, the question of who the injured temp may sue isn’t answered because any definitive answer depends on too many factors — who procured the workers compensation coverage, what the contract between the leasing company and the client company said, what the handling fee for the temporary employee covered, and how the state in which the employee is suing weighs these factors — as it does in real life. Not knowing the status of your protection from lawsuits (either for workplace injuries or employee benefits) should leave you just as uncomfortable. It behooves every personnel or benefits manager to review the laws of his or her state as well as every contract for long-term temps in order to insure that the company will enjoy protection from future lawsuits.

For a discussion of how to handle this coverage issue procedurally and administratively, see Meike Olin’s article, “Lease - But Be Careful Out There,” in the Fall 1998 issue of The Journal of Workers Compensation.

1 Bernstein, Aaron, “Now, Temp Workers Are a Full-Time Headache,” Business Week (May 31, 1999): 46.


The Journal of Workers Compensation is a quarterly review of risk management and cost containment strategies published by Standard Publishing in Boston, Massachusetts. For more information, please visit our web site,, or contact the editor at 800-682-5759, extension 222, or subscription services at extension 228.

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November 2000 

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