The Dangers of Loaned Employees

The outcome of a loaned employee inquiry determines which employer faces exposure for a workers’ compensation claim between the loaning employer and the borrowing employer. It can also impact the type of exposure the borrowing employer faces: workers’ compensation benefits versus tort damages. The loaned employee doctrine itself is very fact-intensive, and Wisconsin case law is difficult to reconcile. So, if an employer wants to ask an employee to perform any work for another employer, it is best to touch base with counsel regarding the proposed arrangement.

What is a Loaned Employee?

The rationale of the loaned employee doctrine is that an employee who is loaned to a borrowing employer becomes a loaned employee (i.e., not an actual employee) of the borrowing employer for workers’ compensation purposes. Thus, if the loaned employee test is satisfied, the borrowing employer faces exposure for a workers’ compensation injury occurring in the course of and arising out of the work the employee performs for the borrowing employer. That all sounds logical and straightforward, but the problem is: the test is very fact-intensive, and Wisconsin case law is often irreconcilable, which creates the risk that the loaning employer could still face exposure for a workers’ compensation claim, even though the employee is injured while working for the borrowing employer.

The loaned employee test in Wisconsin was first articulated by the Wisconsin Supreme Court in 1931. The test has three elements, and four “vital questions” aimed at analyzing the three elements. The three elements are:

1. The employee consents to work for the borrowing employer;
2. The employee actually performs work for the borrowing employer under an express or implied contract; and
3. The borrowing employer has the power to control the details of the employee’s work, including how the work should be done and whether it should stop or continue.

The four vital questions are:

1. Did the employee actually or impliedly consent to work for the borrowing employer?
2. Whose work was the employee performing at the time of the alleged injury?
3. Who had the right to control the details of the employee’s work at the time of the alleged injury?
4. Who primarily benefitted from the employee’s work?

As you can see, the test is very fact-intensive, and sometimes slight variations in the facts can mean the difference between the loaning employer facing exposure for the claim versus the borrowing employer. Ultimately, the essence of the loaned employee test is determining whether the employee consented to leave his or her general employment with the loaning employer and enter into a new employer-employee relationship with the borrowing employer—even if such new employer-employee relationship is very temporary and coexistent with the employee’s general employment. That is, if the employee left his or her loaning employer altogether and began working solely for the borrowing employer under a formal employment agreement, then the employee would simply be treated as a regular employee of the new employer for workers’ compensation purposes.

There is an important distinction between the employee simply consenting to perform certain tasks for the borrowing employer at the behest of the loaning employer, and the employee consenting to a new employment relationship with the borrowing employer. Further, there is a rebuttable presumption that an employee remains in the employ of the loaning employer. By emphasizing the consent of the employee, the test acknowledges that employees lose and gain rights when switching employment relationships. The employers’ autonomies in the situation are not lost, either. An arrangement or understanding between the employers regarding the status of the loaned employee is relevant to the inquiry determining whether the employee has consented to a new employment relationship with the borrowing employer.

Exclusive Remedy Implications

Importantly, according to Wisconsin law, if an employee is found to be a loaned employee of the borrowing employer, the employee cannot sue the borrowing employer in tort to recover for a work-related injury. Thus, the loaned employee inquiry also has important implications under Wisconsin’s exclusive remedy rule. Wisconsin law provides: “No employee who is loaned by his or her employer to another employer and who has the right to make a claim for compensation under this chapter may make a claim or maintain an action in tort against the employer who accepted the loaned employee’s services.”

Bottom Line

The bottom line is the loaned employee doctrine is very fact-intensive, and sometimes the outcome is unpredictable. The loaned employee doctrine not only decides which employer faces exposure for a workers’ compensation claim but also can mean the difference between a borrowing employer facing exposure for workers’ compensation benefits versus tort damages. Employers should be careful when asking their employees to perform even seemingly quick and easy tasks for other employers, because accidents happen. If an employer wants to ask an employee to perform any work for another employer, it is best to touch base with counsel regarding the proposed arrangement.

This article, slightly modified to note recent updates, was featured online in the Great Lakes Employment Law Letter and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.