Employee leasing: Liability in limbo?

The practice of leasing employees, which has become increasingly common in all business sectors, may offer many advantages to client companies. However, this practice can also pose a number of complex liability and insurance coverage issues for risk managers. In most states, the legal status of leased employees is unclear, which consequently affects their coverage under general liability, auto liability and workers' compensation policies. Even with policy endorsements that clarify the employment status of leased workers and indicate appropriate cross-endorsements in the workers' compensation policies of both the client and the leasing company, companies that lease employees may unintentionally expose themselves to direct claims from which they would otherwise be protected. >

Leasing arrangements involve an inherent confusion as to who the employer is. Because of this confusion, risk managers in both companies may face loss control, loss prevention and safety challenges. Proper consideration in structuring the lease contract and ongoing communications can head off problems before they arise.

The failure of a company to address insurance and liability issues can leave both the company and the leased employees in legal limbo. In a recent report, The New York State Inter Agency Task Force on Employee Leasing noted that "the growth in employee leasing .... has led to the realization that the practice is not without serious risks to the state's workers as well as to the client companies who choose to lease their work force."

Employee leasing has been used for years as an administrative convenience for handling many personnel matters, including payroll and benefits. Health benefits is a service offered by leasing companies that is particularly attractive to small businesses that might not otherwise be able to afford such coverage for their own employees. The practice of employee leasing surged, especially among small companies, following enactment of the Tax Equity and Fiscal Reform Act of 1982, which placed limitations on employee exclusions from pension plans.

Although the Tax Reform Act of 1986 greatly restricted the use of employee leasing for purposes solely related to avoiding pension benefit obligations under ERISA, the act certainly hasn't impeded the continued growth of the leased employee industry, which has been cited as one of the fastest growing segments of the economy.

Leasing companies have aggressively marketed their...