Like many small business owners, you may obtain workers through a temporary employment agency. Workers employed by a temporary agency are typically subject to the state workers compensation law. In most cases, the agency insures the workers by purchasing a workers compensation policy on their behalf. Unfortunately, this arrangement can leave your firm vulnerable to a lawsuit by an injured temporary worker.

Consider the following example.

Example

Diane owns Divine Delights, a small company that manufactures cookies and other sweet snacks. The company's sales have increased over the last year and Diane wants to boost production. To increase the plant's output, however, Diane needs another employee. Diane decides to hire a temporary worker for a trial period of six months. If the worker performs well, Diane will make him or her a permanent employee.

Diane contacts Terrific Temps, a temporary agency. The agency sends an experienced worker named Jane to Divine Delights. Jane seems to be a good fit and Diane is pleased with her work. Diane has confirmed that Jane is covered for workers compensation under a policy purchased by Terrific Temps. This is a logical arrangement since Jane is technically an employee of the agency.

Jane has worked at Divine Delights for about three months when an accident occurs. Jane is in the storeroom reaching for a can of baking powder when a shelf suddenly collapses on her.

Both the shelf and its contents fall on Jane, causing a head injury. Jane is taken to a hospital, where she remains for a month. Jane receives workers compensation benefits from Terrific Temps' workers compensation insurer. Jane never returns to work at Divine Delights.

Several months after the accident, Jane files a lawsuit against Divine Delights. The suit claims that Divine Delights is liable for her injury because the company failed to maintain a safe workplace. Diane sends the suit to Divine Delights' workers compensation and general liability insurers. The workers compensation insurer denies coverage, asserting that Jane is not Divine Delights' employee. Rather, Jane is employed by Terrific Temps and is insured under Terrific Temps' workers compensation policy.

Divine Delights' liability insurer also denies coverage for the claim, citing the employers liability exclusion in the policy. Like most general liability policies, Divine Delights' policy excludes bodily injury to any of Divine's employees if the injury arises out of the injured employee's employment. Diane notices that the definition of the term employee in the liability policy does not include a temporary worker. Diane argues that Jane was a temporary worker, so the exclusion should not apply. However, the insurer points out that temporary worker has a very specific meaning in the liability policy. This term means a person who is furnished to the policyholder either as a substitute for a permanent employee on leave or to meet seasonal or short-term workload conditions.

Jane wasn't hired either as a substitute for a permanent employee on leave or to meet seasonal or short-term workload conditions. Thus, Jane does not meet the definition of temporary worker. Within the context of Divine Delights' liability policy, Jane was an employee when her injury occurred. Divine Delights' policy excludes lawsuits brought by employees as a result of on-the-job injuries. Thus, the policy will not cover Jane's suit.

Alternate Employer Endorsement

How could Diane have protected her company against lawsuits like Jane's? She could have asked Terrific Temps to insure Divine Designs as an alternate employer under Terrific Temps' workers compensation policy. A standard NCCI endorsement is available for this purpose.

The Alternate Employer endorsement covers the alternate employer listed in the endorsement schedule. The state in which the worker is employed must be described in the schedule as well. The alternate employer is the temporary agency's client (meaning the company to whom the temporary worker has been assigned). The "temp agency" remains the worker's primary employer. The endorsement covers the client only during the period of the temporary worker's employment by the client.

The endorsement covers the alternate employer for both Workers Compensation and Employers Liability. It protects the client in the event it is required to pay benefits to an injured temporary worker. The endorsement also protects the client against lawsuits brought by the injured worker (like Jane's suit against Divine Designs). The policyholder (temp agency) is normally changed a premium for the endorsement.

The Alternate Employer endorsement does not cover the client's regular employees. It cannot be used to satisfy the client's obligation to its own employees with regard to workers compensation coverage.

Client Not Protected by Exclusive Remedy Rule

In many states, workers compensation benefits are an injured worker's exclusive remedy (sole source of compensation) for an employment-related injury. Consequently, workers who are injured on the job are generally barred from suing their employer. This concept is called the exclusive remedy rule.

Because the client company has not purchased workers compensation coverage for the temporary worker, the temporary worker is not barred from suing the client. Fortunately, the employers liability coverage that is provided by the Alternate Employer endorsement protects the client against such suits. The endorsement covers the client under Part Two (Employers Liability Coverage) of the employer's workers compensation policy.

Duties Imposed on Client

Under the Alternate Employer endorsement, the client (like the employer) must immediately report any employee injury to the employer's workers compensation insurer. The client must also provide immediate medical care to the injured worker and forward all relevant documents to the insurer or its agent.

Finally, the endorsement states that the insurer may cancel the policy without notifying the alternate employer. Since the client is not the named insured under the policy, the insurer has no obligation to notify it if the policy is cancelled.