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Risk Managers' Forum

When a client uses temporary labor firms

Examine the terms of temp service agreement carefully

By Glenn Peterson, CIC, CRM

Organizations face a number of exposures when utilizing services provided by contract/temporary labor companies. In most cases, the organization utilizing the services expects that, in exchange for paying the labor provider a rate, the labor provider will address any issues/losses/claims associated with the services provided by its employees. A properly written agreement, supported by insurance, is a critical part of the process necessary to ensure that such expectations are met.

Without a proper written agreement in place, there may be situations where your client's organization could be financially responsible for paying claims or dealing with lawsuits relative to injuries to, or the actions of, the labor provider's employees. Examples include the following:

• Injured contract labor workers could be deemed to be your client's employees for workers compensation purposes (for both benefits and premium payment).

• The contract labor provider's insurers may subrogate against your client. In other words, the contract labor provider's insurers will try to make your client's organization reimburse them for any payments they have made on behalf of their insured. You can overcome this by requiring that the labor provider's insurers waive subrogation in favor of your client;

• Your client could be liable in lawsuits brought against it by the contract labor provider, its employees or their families, their legal representatives, and/or heirs.

• Your client could be subject to labor-related fines/penalties.

• Your client could be deemed vicariously liable for auto accidents involving contract labor workers while they were driving a vehicle related to work for your organization.

In order to manage the types of exposures set forth in the above examples, it is necessary that the applicable agreement contain appropriate indemnity and insurance provisions to protect your client. Note that such agreements should always be reviewed by legal professionals prior to their acceptance and execution.

It is important that the contract labor provider has the financial capacity to support the indemnities/liabilities that it assumes. There are two general ways to do this: 1) ensure that the contract labor provider is financially sound and credit-worthy, and 2) insurance.

If a contract labor provider is financially strong, it will have the funds available, or can borrow the funds to support the indemnities that it has assumed in the written agreement. By incorporating insurance requirements that backstop the indemnities into agreements, you can look to both the contract labor provider and its insurance for compliance.

It is important to clarify each party's responsibility for safety- and health-related issues in the written agreement. Questions that need to be addressed include:

• What general types of safety training are required by law and by your client's policy (safety orientation, Material Safety Data Sheet location, emergency response plan, etc.)? Which specific types of training are needed for the jobs to be performed? Of the identified training, which party provides the initial safety training and which party provides site-specific training? (Remember that your safety policies may be more stringent or more specific than OSHA requires.) Regarding training provided by the contract labor provider, are their instructors qualified to conduct the training? Do they keep the required written training records? Where are the records stored and how does your client gain access, if needed? For example, the contract labor firm may provide general Hazard Communication training that must be supplemented by your client's site-specific Hazard Communication training.

• Which party is responsible for supplying personal protective equipment?

• How will the issues of medical monitoring and contract/temporary laborer medical files be addressed?

• Who is responsible for drug testing, if utilized?

• If contract or temporary workers are to drive any vehicle on behalf of the organization utilizing the services, there should be a provision relating to driving records/vehicle use. In other words, what steps does the contract labor provider take to ensure that its employees have responsible driving records?

Note that, if your client is the host employer, it is likely responsible for OSHA reporting and record keeping relative to employees of contract labor firms working at its sites. This includes the completion of OSHA 300 and 300A forms. Whether your client is deemed to be the employer in such a situation depends on a number of "control" tests. Information on these tests can be found in letters of interpretation at

Suggestions for your clients (or for you if you use temporary labor firms):

• Be wary of issuing job orders over the Internet. In order to do so, you may have to acknowledge that you accept the contract labor provider's electronic terms and conditions as a precedent to completing the order. Such terms could be contrary to your organization's interests. In order to avoid this, the written agreement should contain a section stating that the agreement controls over any provisions to the contrary contained in purchase or work orders, on Web sites, or in other related documents issued by, or owned by, the contract labor provider.

• Be sure that the agreement does not limit your organization's ability to use other labor contractors as you deem appropriate (do not agree to exclusive provider terms).

• One advantage of contract labor is that an organization may identify persons sent by the temporary labor firm whom it wishes to hire as full-time employees. Thus, the organization should ensure that the agreement sets forth the terms for its being able to do so (timing, fees, etc.).

• Include language stating that the indemnities assumed by the contract labor provider will survive termination of the agreement. If an action is brought against your organization after termination of the agreement for an event that took place during the term of the agreement, you want the contract labor provider to assume the liability.

• The agreement should specify that the labor provider is not permitted to utilize any subcontractors on jobs performed for your organization. The permitted use of subcontractors in these types of agreements opens up another set of potential liabilities.

• Clarify that your organization can immediately remove any contract labor employee it deems to be unsafe or unsuitable for the job, in your organization's sole discretion.

• There is a relatively new trend in indemnity language whereby companies try to contractually limit their assumed liabilities. There are two common forms of this. The first form is where the company assuming the indemnity limits its liability to a specific dollar amount—say $100,000. The second form is where the company assuming the indemnity limits its liability to the amount of money your organization has spent with it. For example, suppose your organization enters into an agreement with a labor provider and ultimately pays the provider $240,000 for services. Further assume that the service agreement with the labor provider states that its liability is limited to the amount it is paid under the written agreement (in this example, the $240,000). To take this example a step further, suppose that as a result of an accident involving one of the labor provider's employees, your organization is sued for $1 million and is ultimately deemed liable for the full amount. In this example, the most the contract labor provider would pay under the indemnity is $240,000. Your organization would then be responsible for the remaining $760,000. In this writer's view, if the contract labor provider holds itself out to the public as a provider of qualified/trained labor, then it should assume the liabilities associated with same.

• Require that the labor provider's workers compensation coverage includes an Alternate Employer endorsement in favor of your organization.

It is always preferable to take the time, up front, to clarify the terms of business. With a properly structured labor services agreement, should an accident or incident occur, you know who is responsible for what. Without clarification, after-the-fact events can become expensive, time-consuming, high-profile, and potentially damaging to the reputation of your organization (litigation, regulatory fines and penalties, media coverage, etc.).

For more information:

Top O' Michigan Insurance

Web site:

Applied Systems Client Network

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