Court Closes Workers Compensation Loophole for Staffing Companies

Posted by Christopher Geehern on Apr 30, 2013 11:00:00 AM

The following guest blog was written by Martha J. Zackin, Esq., Of Counsel to the law firm Mintz, Levin, Cohn, Ferris, Glovsky &  Popeo, P.C.

A recent Massachusetts court decision upheld efforts by staffing companies and workers compensation insurers to close a loophole that allowed staffing-firm employees injured at a client company both to collect workers compensation benefits and to sue the company where they were hurt.

Martha ZackinThe Superior Court for the Commonwealth of Massachusetts, Suffolk County, held that by virtue of an alternate employer endorsement naming a staffing company’s client as an insured under the staffing company’s workers’ compensation policy, the client company is entitled to the same immunities as the staffing company under the Workers Compensation Ac (the Act).

Massachusetts employers since 1911 have been required by law to carry workers’ compensation insurance covering their employees, or to qualify as a self-insured under the Act.  An employee injured in the course of working for a covered employer is almost always entitled to monetary benefits, medical care, and rehabilitation services, regardless of fault or negligence.  In exchange for near-guaranteed benefits, covered employers are generally not subject to civil liability or suit by injured workers or their families.  This concept is described as the “exclusivity provision” of the Act or “immunity” under the Act.

In Massachusetts and elsewhere, staffing is a growth industry.  Staffing agencies lease employees to their clients to perform work that is part of the routine operations of the client’s business, typically side-by-side with and doing the same work as the client’s employees.  Effective use of temporary labor helps the 90 percent of U.S. companies that use staffing agencies to ramp up and down, as production needs fluctuate, without incurring the costs associated with managing employment processes.

With the growth of the staffing industry and the increasing use of temporary workers, an anomalous situation has developed whereby employees of staffing companies injured while performing services for their “direct” employers’ clients have been able to receive workers’ compensation benefits from their staffing company employers and sue the staffing clients for damages.  Stated differently, an injured employee of a staffing company would have the right to sue the client company for common law damages, but an injured employee of the client company, working side-by side with and doing the same work as the client employee, would not.  

To address this problem, workers’ compensation insurance carriers began selling alternate employer endorsements to provide primary workers’ compensation and employers’ liability coverage to staffing agencies’ clients so that client companies would be insured under the staffing companies’ policies and entitled to the same immunities associated therewith.  Until now, however, no Massachusetts court has directly addressed whether immunity under the Act extends to clients of staffing companies, to protect those clients when staffing company employees are injured during the course of providing services to the client.   

In a case of first impression, the Superior Court for the Commonwealth of Massachusetts answered the question in the affirmative.  Specifically, in Molina v. State Garden, Inc., the Court held that the alternate employer endorsement entitles the client company to the same immunities as the staffing company under the Act.

This case is important for a couple of reasons.  First, it protects staffing companies from having to indemnify clients against claims arising out of workplace injuries – or fighting with clients about responsibility for such claims – the costs of which are almost never factored into the fees charged by staffing companies to their clients.  Second, insurance companies may rest easier, knowing that at least one Massachusetts court has validated the need for, and practicality of, alternate employer endorsements. 

The Molina decision underscores the importance for staffing companies to obtain alternate employer endorsements that specifically name clients as additional insured.  The decision also underscores the importance for workers’ compensation carriers to educate staffing clients about the use of alternate employment endorsements.

Topics: Workers Compensation, Employment Law, Human Resources

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