Why Every Owner and Contractor Must Beware of the "Borrowed Servant Rule"?

Contractors - of all tiers - are surprised to discover they could be a “special employer” of individuals employed by independent third parties upon their projects, including skilled or unskilled labor employed by a temporary staffing agency or operators employed by a equipment rental company. Most contractors - including owners who self perform – are even more surprised to discover they could be primarily responsible for the negligent acts and omissions of individuals employed by third parties by virtue of their “special employer” status. Many ask how a contractor could become a “special employer” primarily responsible for negligence of an individual for whom they do not pay wages, do not withhold taxes, do not provide benefits, and who is employed by an independent third party?

The answer is found in an antiquated theory of law known as the “Borrowed Servant Rule” that makes contractors “special employers” of individuals or “borrowed servants” who, although employed by a separate independent company, are temporarily used, lent or rented to the contractor for a limited purpose. Based upon outdated concepts governing the master-servant relationship, the Rule (or doctrine as lawyers call it) is based upon who controls the “servant” and is recognized, in one form or another, in almost every state causing nightmares for countless contractors.

A classic example of a “borrowed servant” involves the situation where a contractor rents a crane or backhoe and the equipment rental company provides its employee(s) to operate the equipment. Under the “Borrowed Servant Rule”, the contractor typically becomes the “special employer”, the operator the “borrowed servant” and the equipment rental company the “general employer”. Once found to be a “special employer”, the contractor often becomes primarily responsible for all damages to person or property caused by the negligence of the crane operator, including injuries to the operator and damages to the crane or backhoe itself!

There are two generally recognized tests as to whether a contractor will be a “special employer” under the “Borrowed Servant Rule”, both of which are predicated upon the concept of control. The first test is whether the contractor is given a contractual right to control both the work and the manner in which the “borrowed servant” performs the work. Such rights are often created by boilerplate language located on the backside of a rental agreement, services contract, daily ticket, acknowledgement or other document. More often than not, the recipient of the document does not know and is not told an express contractual right of control has been granted to them. Contractors can nonetheless become a “special employer” by virtue of such boiler plate language, even though the term “borrowed servant” is not mentioned in the document and even if the contractor never exercises actual control over the “borrowed servant”.

A second test is whether the contractor actually exercises direct control over the “borrowed servant”. Here the obligation arises from the conduct of the contractor in controlling both the work and the manner in which (i.e. where, when, how) the “borrowed servant” performs the work. Unlike the first test, no contract is required for the contractor to become a “special employer”, rather the mere exercise of control over the “borrowed servant” is sufficient. Contractors frequently become “special employers” under both tests of the “Borrowed Servant Rule”, in that they are given a contractual right of control and exercise actual control over the “borrowed servant”.

Most of the risks and liabilities created by the “Borrowed Servant Rule” arise in the context of temporary labor or equipment rentals where it is common practice for contractors to control, by one degree or another, the employees of a third party. The standard forms used by staffing agencies and equipment rental companies recognize this practice and almost always give the contractor the right to control the work to be performed by the so-called “borrowed servant”. At the same time, these standard forms seldom if ever, indemnify the contractor against the negligence of the “borrowed servant” or make the contractor an additional insured under the “general employers” comprehensive general liability (GL) policy.

Since most contractors are unaware of the “Borrowed Servant Rule” and have no reason to suspect such archaic laws are still on the books, many do not modify these standard forms and presume the insurance coverage supplied by the “general employer” is sufficient. Once the “borrowed servant” steps foot on project, the contractor becomes their “special employer”, primarily responsible for all negligent acts and omissions they commit, often without any recourse against the staffing agency or equipment rental company furnishing the “borrowed servant”.

The first time many contractors learn of the “Borrowed Servant Rule” is when they suffer a loss due to the negligence of a “borrowed servant” and discover they are responsible for the entire deductible under their insurance, or worse yet are responsible for the entire loss due to a lack of insurance coverage. At or about that same time, contractors also discover that the workers compensation insurance and GL policies provided by the staffing agencies and equipment rental companies seldom, if ever, offer coverage for personal injury and property damage suffered or caused by “borrowed servants”.

Unless the standard forms used by the “general employer” have been modified, the contractor as the “special employer” is left “holding the bag” for claims and losses caused by the “borrowed servant”. Personal injury claims made by the “borrowed servant” are submitted to the contractor’s workers compensation policy impacting their safety rating and increasing premiums. Third party claims for personal injury and property damage are submitted to the contractors GL policy subject to the deductible and increased premiums. But perhaps most costly of all, property damage claims to the work itself (including schedule impacts) are most often absorbed by the contractor, due to coverage exclusions for the work and product under the contractors GL Policy. Learning about the Rule can be a very costly lesson!

Those contractors who have been bitten by the Borrowed Servant Rule”, can and often do mitigate, if not eliminate, the risks of becoming a “special employer” through a combination of insurance and indemnification. First, they often require the “general employer” (e.g. staffing agencies, equipment rental companies) to purchase an “alternate employer endorsement” extending their workers compensation coverage for the “borrowed servant” to the “special employer”. Second, they often require the “general employer” to indemnify the “special employer” against all losses, damages and claims arising from the negligence of the “borrowed servant”. Third, they often require the “general employer” to name the “special employer” an additional insured under the “general employers” GL Policy. Finally, they always keep a watchful eye upon the “Borrowed Servant Rule” in every state in which they perform work!

This post contains information that may affect your business decisions, it should not be considered as legal advice and does not create a lawyer-client relationship. Some states have enacted legislation relative to "special employers" and the reader is cautioned that application of the "Borrowed Servant Rule" varies between jurisdictions.