Temporary Employees, Full Time Risks

Using contingent workers can relieve your organization of some human resource functions, but it can create liability exposures.

When you hire temporary or leased employees, the agency acts as the employer. The agency is responsible for screening employees, paying employment taxes, providing workers’ compensation and, in some instances, providing employee benefits. The agency pays the employee directly, invoicing your organization (at a marked-up rate) for hours the employee works.

Under a temporary or leased employee arrangement, your company will enter into a contractual agreement with a staffing company—whether a temporary agency or employee leasing firm (or PEO, professional employer organization). Both entities become co-employers and share or allocate employment responsibilities. The staffing company usually handles all human resource and benefit management functions. It hires workers, controls payment of wages, provides unemployment insurance and other benefits, and handles employment taxes. The subscribing company retains some employer responsibilities, including supervision, to ensure the delivery of the company’s products or services.

Benefits of temporary employment or PEO arrangements include:


  • Expert human resource and benefit administration. PEOs and temporary employment agencies can devote full-time, professional staff to these tasks.
  • Better benefits. Larger PEOs and agencies manage thousands of employees, giving them more purchasing power than individual small employers have.
  • Better safety. A PEO should have on-staff safety professionals, who conduct regular audits that could reduce injuries and costs.


Still, using contingent employees can create risk exposures, including:


1   Workers’ compensation coverage gaps. Some states permit PEOs to provide workers’ compensation for their clients. If yours does, ask the PEO for a certificate of insurance as evidence of coverage. And make sure the PEO’s policy includes an “alternate employer endorsement” to cover employees injured while working for you. Even if your PEO provides coverage, you might want to keep a minimum premium workers’ compensation policy in place. A minimum premium policy will provide some protection if your PEO fails to buy coverage or stops making premiums—just make sure your insurer agrees to cover leased employees as regular employees.

2   Lawsuits from injured workers. Even if your PEO or lease arrangement includes workers’ compensation coverage, the worker can sue your company for negligence if unsafe or hazardous conditions led to the injury. Most commercial general liability policies exclude coverage for “special employees,” such as leased employees or independent contractors. You can remedy this coverage gap by adding the “coverage for injury to leased workers” endorsement.

3   Gaps in umbrella liability. Some umbrella policies require you to schedule the underlying employers’ liability policy, which is part of your workers’ compensation policy. If you have no workers’ compensation policy in place, your umbrella might not respond to an employer’s liability claim. Having a minimum premium workers’ compensation policy could help eliminate this coverage gap as well.

4   An organization can still be held responsible for discrimination law violations when using a temporary agency or PEO. To protect your company, consider buying employment practices liability coverage. If you already have a policy, make sure it includes leased and special employees in its definition of covered employees.

5   Employment tax liability. When you contract with a PEO, the IRS considers it the “employer of record” for employment tax purposes. However, if you maintain too much control over the employees, the IRS could consider your firm the employer and liable for withholding and Social Security. State laws on leased employees vary. Some states consider the PEO to be the employer, while others consider the PEO a co-employer.


Before entering into a PEO or leased employee arrangement, check the provider’s qualifications and references. The Employer Services Assurance Corporation conducts voluntary accreditation for PEOs. See their listing of accredited PEOs at www.esacorp.org. You can also check whether a PEO’s risk management staff has earned professional accreditation at www.certificationinstitute.org.

We can review your insurance program to help you manage any employment-related exposures, no matter what type of employees your organization has. For more information, please call us.