Worker’s Compensation Insurance and Subcontractor or Outsourced Labor

All employers have an obligation under OSHA’s general duty clause to provide a safe and healthful workplace, whether using employees or contract labor to get the job done. As more employers are using outsourcing of labor to cover specialized tasks, there are new concerns for employers about these contractual employees being injured on the job. When it comes to Worker’s Compensation policies, these outsourced workers are generally not covered by your policy. However, if these workers are injured, they still may be able to sue you in a personal injury or negligence lawsuit.

To protect yourself against both Worker’s Compensation and civil action lawsuits, you should do some research before committing yourself to outsourcing labor. Be sure that the potential subcontractors are able to provide a valid certificate of insurance. The coverage should include a general liability, automobile liability, and worker’s compensation policies. If this is provided, the first line of coverage in the case of injury will be this policy.

However, you must be cautious about workers claiming “statutory employee” status. Outsourced employees can claim statutory employee status for WC purposes if you have treated this subcontractor more like an employee than an independent worker. When determining this status, courts may ask: “Do you set the hours of work for this person? Do you control how this person performs the work? Do you provide tools and materials needed to do the work? Does the person perform essentially the same work as others who are actually employees?” (“Outsourcing,” 2000, p. 11).

If the injured worker is able to claim statutory employee status, you may have Worker’s Compensation obligations you were not anticipating. To circumvent these unforeseen obligations, be sure there is language in all contracts with independent contractors that clears you from damages or injures that arise out of the contractor’s work.

Temps are another consideration with outsourcing. Temps are almost always considered statutory employees by law. Some basic steps to protect your company if considering hiring temps from an employment agency:

• Check the agency’s Worker’s Compensation coverage. Do they have a valid certificate of insurance?
• Become an additional insured on their insurance Worker’s Compensation policy. If a temp is injured and you are an Additional Insured on the temp agency’s policy, you are protected from claims against you as employer.

References: Outsourcing: Whose workers’ comp applies? (2000). Maintenance Management, 26.11, 10-11.