Many employers lease rather than hire employees to reduce the costs of managing employee payroll and benefits. Leasing firms usually carry workers’ comp insurance on the leased workers, which can save you money and headaches. But as one employer recently found, if you don’t administer your leasing arrangement carefully, you could face expensive legal problems if a leased worker gets hurt on the job.
Leasing Arrangement
Diamond Woodworks transferred its employees to a leasing company, Builders Staff Corporation (BSC), and BSC leased the workers back to Diamond. BSC carried workers’ comp insurance on the leased workers through Argonaut Insurance Company.
The leasing contract between BSC and Diamond stated that BSC was the employer of any BSC employees used by Diamond under the contract. The contract explained that no one could become a BSC employee until the person signed all pages of a hiring packet and BSC approved the hiring.
New Worker Injured
Damian Wilcox began work on February 25, but Diamond didn’t immediately submit his hiring packet to BSC. Later that same day, Wilcox severed four fingers while operating a saw. A Diamond supervisor then signed Wilcox’s name on a BSC employment application and faxed it to BSC with an injury report.
BSC reported the injury claim to Argonaut, but advised the insurer that it didn’t believe Wilcox was eligible for benefits because he wasn’t a BSC employee. Argonaut denied the claim.
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Huge Fraud Verdict
Wilcox contested the denial and sued Diamond for damages, claiming the firm didn’t carry workers’ compensation coverage. (The court ultimately dismissed the suit because Argonaut later paid Wilcox’s workers’ comp expenses.) Diamond in turn sued Argonaut for breach of contract and fraud. A jury ruled in Diamond’s favor, awarding more than $675,000 in damages plus a whopping $14 million in punitive damages. After a trial court reduced the damages and slashed the punitive award to $5.5 million, both Argonaut and Diamond appealed.
Court Finds Fraud
A California Court of Appeal upheld the jury verdict but ruled that the punitive damages were excessive.
First, the court found that Wilcox was BSC’s employee because BSC never enforced the leasing contract provision that it had to preapprove hires for them to become BSC employees. In fact, BSC invariably employed workers from the day they started on the job regardless of whether hire paperwork had been submitted. Thus, Wilcox was entitled to workers’ compensation benefits under BSC’s Argonaut policy.
Second, because BSC purchased the insurance policy for its own and Diamond’s benefit, Diamond could sue Argonaut under the BSC-Argonaut workers’ comp insurance agreement. What’s more, Argonaut was liable for fraud because BSC made an implied but false promise to Diamond that all employees would be covered under the leasing arrangement from their first day of work, even though it intended to deny workers’ comp coverage to anyone who was injured before the hire paperwork was completed.
Finally, relying on a recent U.S. Supreme Court decision limiting punitive damages, the court said the $5.5 million punitive-damage award was too large. The court gave Diamond the choice of accepting reduced punitive damages of $1 million or a new trial.
How to Protect Yourself
As this case illustrates, you can run into big problems if you don’t strictly follow a leasing contract’s terms. Although Diamond Woodworks won, it had to expend con-siderable time and money.
To avoid this situation, if you lease employees, make sure everyone in your company involved in hiring knows and follows the hiring and approval practices the leasing contract requires. Keep copies of all hiring paperwork and fully document hire and approval dates.