I recently asked an owner of a large General Contracting firm in NY why he was leasing certain labor functions rather than subcontracting them out or retaining the labor in house. His answer was both confident and succinct; “business reasons.” In his parlance he was proud as a peacock that he had found a way to “artificially” lower his cost structure thereby substantially increasing his profit margin.
Glancing up at me from his gargantuan marble top desk he looked for signs of approval patiently waiting for me to give him the customary golf clap most of his “trusted advisors” adorn him with. Quite the contrary; as I revealed to him that while business leasing lowers his initial cost structure the tactic could bury him in years of litigation and judgments which not only erase all the profitability of his current job, but run the risk of putting him out of business altogether. In one phone call, I had his attention.
Simply put, while employee leasing works very well in many states, in New York it’s extremely problematic. This is especially true for occupations like construction that have high job site injury rates. Unlike most other states NY has two laws on the books called Labor Law 240 & Labor Law 241 that allow injured workers to not just collect workers compensation benefits from their employer but also litigate against other “responsible parties.” Worse, the other “responsible parties” are subject to absolute liability which means common law negligence standards don’t apply. This isn’t an article about the “Scaffold Law.” If you want to learn more about that read a prior article entitled Critical NY Labor Law Statutes.
With the Scaffold Law as backdrop here’s the issue; since leased employees are not YOUR employees if they are injured on the job site they have the ability to litigate under Labor Law 240 & 241. Essentially they can and will litigate against your general construction or trade contracting firm, simply because they can. Here’s the Psycho shower scene part. They (leased employees) will also litigate against your customers whom you have provided contractually both defense and indemnification in their favor! For those keeping score at home you are being sued by the leased employee AND your customers who are also getting sued yet passing both the cost and potential judgments back to you. Enter Anthony Perkins; none of this is covered by insurance which means the entire cost of the defense for ALL parties and the judgment/award is being funded entirely with your balance sheet!
The owner looks up at me and says, “yeah but I have a certificate of insurance in which I am named as additional insured!” I asked the General Contractor to pull out his general liability insurance policy from which I pointed a knowing little finger at the “Leased Employee” exclusion within the contract. I applauded the fact he had a contract in place and a Certificate of Insurance however I shared with him that you are only an additional insured if you meet certain requirements, one of which is it MUST be a covered cause of loss for the lead policyholder which in this case if your employee leasing vendor isn’t covered, neither are you. I looked up and said "let’s play a quick little game of chess and watch as the pieces move around the board.” No matter how you play this it’s going to be checkmate for you. Check mate means you can’t fund the risk exposure by purchasing insurance as it’s ostensibly an uninsurable risk in NY. I said the typical Labor Law case runs somewhere around $350,000 to settle plus legal costs according to Howard Klar a noted construction defense attorney for Gallo, Vitucci, & Klar. That’s only average. If you have a severe case it could be millions.
I looked up at the owner again, brow furled in consternation; “why hasn’t my insurance broker brought this to my attention?” Ah grasshopper I can’t answer that one. I will say the vast majority of brokers simply push paper, and think they did an outstanding job if they lowered your premium which doesn’t necessarily mean your costs are now lowered. Most owners aren’t aware that lower premiums are usually the result of more risk being retained by the construction firm which only manifests itself if a loss occurs. How much does the insurance cost when you include the cost of denied claims? This too is another conversation.
When our Risk Advisors are engaged in the employee leasing conundrum we almost always counsel our clients to steer clear. It is possible to transfer some of the risk back towards the employee leasing firm contractually whereby if the Psycho event occurs the construction firm passes the litigation and indemnification requirements back to the vendor. As with most ideas, it sounds good on paper. The reality is that most firms that lease out their employees to other firms DO NOT have the proper insurance in place which means it’s an unfunded liability for them too. Further, in the off chance they do have the right insurance, (yet to find one that does), chances are you will still have to litigate against the employee leasing firm and their insurance carrier to force them to pick up the tender which not only has a cost, but also has a degree of probability that the tender might be denied in THEIR favor saddling you with the loss contingent on the details of the Psycho event.
It’s the writer’s position that here in the great State of New York that as long as the Labor Law remains on our books that the best and ultimately the most cost consistent way to deal with this issue is to either subcontract and vet the subs insurance, or hire your own work force. It costs a little more in the short term, but you won’t risk everything you built if Anthony Perkins comes a calling. Just sayin……