Employee Leasing: 4 Factors to Consider When Borrowing or Leasing Employees

Businesses today have a plethora of options to consider when hiring workers for their business. Entrepreneurs can leverage the gig economy to find independent contractors for project-specific or freelance work. They can also look to seasonal employees to handle the holiday rush and other peak seasonal assistance. And, of course, they can always hire traditional W-2 employees.

There’s also yet another way that entrepreneurs can procure key labor without resorting to using traditional employers. This is through borrowing employees from other businesses or leasing them from staffing agencies or professional employer organizations (PEOs). These employees are not owned by your business and won’t need to be included on your payroll. Instead, you would be either borrowing them from another business or hiring them from agencies that have databases of employees available for hire. Businesses usually can do this by contracting workers from a hiring agency or PEO.

Just because you’re borrowing or leasing employees, however, doesn’t mean that you’ll face fewer responsibilities when compared to working with traditional W-2 employees. Much of these responsibilities will depend on how you manage your leased employee relationships, including how you work with your leased or borrowed workers and how you address various contractual, workplace safety-related, and insurance provisions with your staffing and insurance partners.

Here are some considerations that you should keep in mind as you’re contemplating whether borrowing employees from other organizations or leasing employees from staffing agencies and PEOs would be the right move for your business.

Employee Leasing: Keep These Factors in Mind

1. What Is Your Potential Liability to Customers for the Employees’ Acts?

Depending on the nature of your employment relationships, your company could be liable for any injuries or other harm your borrowed employees inflict on other individuals over the course of their employment. State and federal courts typically make these determinations on a case-by-case basis by comparing the circumstances behind the employment relationship at issue against one of several multi-factor analysis tests.

Although the actual legal tests courts use depend on the specific state or federal laws at issue, the multi-factor balancing test introduced in Ruiz v. Shell Oil Company covers many of these applicable factors. No one factor is considered dispositive in the Shell test or its comparable counterparts, but courts have generally given greater weight to the level of control the new employer held over the leased employee’s job duties and work, particularly whether the employer provided authoritative direction and guidance about how the employee was supposed to perform his or her job. 

Other factors that may be analyzed include which party the employee’s work was benefitting, whether there was an agreement or meeting of the minds between the new and original employers, whether the employee agreed to the new work situation, and whether the original employer terminated its relationship with the employee.

In addition, courts may consider the length of time of the employment arrangement, which business had the right to discharge the employee, which business was obligated to pay the employee, and which business supplied tools and place of performance to the employee.

In any event, consulting with an experienced employment attorney can be a great first step for determining how you can best integrate leased or borrowed employees into your workforce.

2. How Are You Prepared to Handle Potential Exposure to Workers’ Compensation Claims?

Workers’ compensation liability can also be a major issue for employers who retain borrowed or leased employees—regardless of whether your contracts exclude leased workers from being recognized as employees.

In the recent Illinois case France v. Graphic Packaging International, Inc., the plaintiff—a leased worker—tried suing the defendant for negligence arising from a workplace injury while working for the defendant company. Even though the defendant’s contract with the plaintiff’s staffing agency precluded him from being considered an employee of the defendant, the court found that the defendant exercised enough control over how the employee performed his work to consider him a “borrowed employee” despite the contract’s terms.

This result actually worked to the defendant company’s benefit, since this meant the employee could only seek recourse for his injuries through state workers’ compensation law instead of through a more costly civil court suit.  

Still, this advantage will only work for your business if your workers’ compensation policy covers borrowed employee claims. Companies should work with their employee staffing partners and insurance companies to determine whether using alternate employer endorsements or multiple coordinated policy endorsements can help address these potential liability issues. Alternate employer endorsements can help mitigate the new employer’s workers’ compensation liability to leased workers by requiring the staffing agency or PEO you’re working with to include your business as a “special employer” on its workers’ compensation policy.  Doing this would allow your organization to enjoy the same benefits and restrictions the staffing agency or PEO receives under its workers’ compensation plan.

Multiple coordinated policy endorsements, on the other hand, would require the new employer to include applicable borrowed employees on its own workers’ compensation plan.

3. How Will You Address Workplace Safety Issues With Your Borrowed or Leased Workers?

Businesses are required to meet minimum standards for maintaining a safe and healthy working environment for its workers under the federal Occupational Safety and Health Act. With leased or borrowed workers, this responsibility is shared by both the new employer and its staffing partners. According to established guidance from the Occupational Safety and Health Administration, staffing agencies must ensure that their employees receive proper training before they’re leased out, although new employers may also need to offer additional training relating to any job or site-specific hazards.

New employers may also need to supply mandatory safety equipment and perform necessary medical evaluations to ensure the health and safety of leased employees. On top of this, either the staffing agency or the new employer will need to document all sickness and injury records depending on which one has full supervisory control over the employees. Both, however, are jointly responsible for ensuring all employees are notified and trained about pertinent hazardous chemicals, and both will be cited jointly by OSHA for workplace violations. OSHA suggests that businesses and agencies should clarify their compliance obligations in their contracts.

4. Would Bringing on Leased Employees Trigger Any Additional Regulatory Obligations?

Some federal regulations require businesses to follow different sets of compliance procedures that depend on the number of workers they’ve hired. Some of these regulations factor in not only the number of traditional employees you have on payroll, but also the number of nontraditional employees you’ve hired—including leased or borrowed workers.  

The Worker Adjustment and Retraining Notification Act (WARN Act), for example, requires businesses to count its number of leased workers and other non-part-time employees when determining whether it meets the act’s 100-employee threshold for having to provide advance notice for planned layoffs and worksite closures. Naturally, you should consult with your in-house legal team or outside counsel to determine whether onboarding leased or borrowed employees could impact your regulatory compliance obligations.

Employee Leasing: The Bottom Line

Employee leasing or borrowing can be a great way to address your immediate staffing needs without worrying about the payroll, human resources, and tax-related issues that can arise when hiring traditional employees.  Still, you should make sure you fully understand the benefits and drawbacks of this strategy and see how it could potentially impact your business operations. With the help of experienced employment and insurance attorneys, you’ll be able to discover whether borrowing or loaning employees would make sense for your business.

Disclaimer: This article has been prepared for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.

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