Temporary Employees and the Borrowed Servant Rule: A Case Study

By Kenneth C. Brown and Mark A. Abramson

I. Introduction:

A temporary employee is injured at work. The injury is the fault of the company that contracted with the temporary agency for his services. The injured party is only entitled to workers' compensation benefits, right? Not necessarily.

In LaVallie v. Simplex Wire and Cable Company1, the New Hampshire Supreme Court ruled that an employee of a temporary agency was barred from suing the company that contracted with his employer for his services. The court found that the temporary employee was the borrowed servant of the company that purchased his services. This article will show that LaVallie does not control all temporary employee situations. In fact, in the case described below, with the help of law we created in two earlier New Hampshire Supreme Court cases2, we recovered $6,825,000.00 for the estate of a temporary employee from the companies that purchased his services.

II. Factual Background:

In May of 2000, James Whitley was 23 years old and he had a checkered past. He had just been released from jail and had battled substance abuse problems for his entire adult life. In an effort to turn his life around, he signed on with a local temporary employment agency and was assigned to work at a large manufacturing plant. The manufacturing facility was owned by Laars, Inc. and Laars employed all of the full time workers at the facility. However, the facility was identified as a "Parent Corporation"3 facility.

When he was assigned to work at the facility, Mr. Whitley was told that it was a Parent Corporation facility. In order to be eligible to work at the plant, Mr. Whitley was required to sign a document entitled, Temporary Status Employee Waiver. The document, which Parent Corporation had provided to the temporary agency, stated

I understand that I am an employee of [the temporary agency]. I agree, acknowledge and understand that I will not have the employment status of an employee of [Parent Corporation] and will not participate in any employee benefit plan or group insurance plan or program, including but not limited to: retirement plan, stock purchase plan, health and welfare plan, vacation, stock option plan, and other fringe type benefits of any type from the Company, even if I may be considered eligible to participate in or receive benefits pursuant to these plans.

I agree that I am being paid an amount which is intended to provide for a premium so that I can purchase benefits as I so desire. I understand the significance of my exclusion from and waiver of rights pursuant to those employee benefit programs and irrevocably agree to my exclusion from these plans. I agree that I will be excluded regardless of whether I am classified as an employee for any other purpose.

Mr. Whitley signed the document and began work at the plant.

Mr. Whitley worked for two weeks at the plant performing various different tasks. On May 24, 2000, he arrived for work just before 6:00 a.m. and was told that he would be learning how to operate a new machine. In order to operate this machine, a length of copper tube is first placed into a rack and then slid into a hole in the machine itself. Once the tube is placed into the machine, the tube spins at approximately 200 rpm and then feeds its way from the rack through the machine and out another hole onto another rack. The spinning tube is fully exposed to the operator throughout the process. It is not guarded in any way.

The person showing Mr. Whitley how to operate the machine was employed by Laars, Inc. He demonstrated the process by running a tube through the machine with Mr. Whitley watching. He then started another tube, told Mr. Whitley to stay at the machine, and ducked under the spinning tube to go to the other side. After briefly staying at his station, Mr Whitley followed, ducking under the tube, but his long ponytail became entangled. He was lifted off the ground and his entire body was rotated around the tube repeatedly until his neck fractured and the skin on his face and scalp tore loose dropping him to the floor. He remained conscious throughout this ordeal.

Mr. Whitley's entire face and scalp were torn off in the accident. The emergency room physician reported that only shreds of his eyelids were left. He also suffered a fracture/dislocation at C6-C7 and a spinal cord injury which paralyzed him from the chin down. He underwent a number of surgical procedures to reattach his face and scalp. These procedures were generally considered successful by the physicians, but he remained grotesquely disfigured. Mr. Whitley had very poor eyesight, compromised hearing, and was unable to speak. His mind, however, was completely intact. He survived for nineteen months, finally succumbing to his injuries on January 10, 2002. He died without a wife or any dependents.

Referring counsel and the workers' compensation carrier both expressed concern that Mr. Whitley had no cause of action against Parent Corporation. Once we got involved, we carefully checked the temporary agency's records, the OSHA inspection file, and the public records. We learned that the building in which the accident occurred was actually owned by Laars, Inc. We also learned that neither the temporary agency nor Mr. Whitley had ever heard of Laars.

Prior to Mr. Whitley's death, we brought suit against Parent Corporation and Laars, Inc. In discovery, we learned that two years earlier another worker at the facility had gotten his hair caught while ducking under a tube that was spinning in the same machine. He had some hair pulled out but was not seriously injured. The supervisor of the department was aware of this incident, but senior management denied any knowledge of it. We also learned that workers regularly ducked under the unguarded spinning tubes, including supervisory personnel. The defendants' primary defenses were immunity pursuant to the workers' compensation bar and comparative fault.

III. The Borrowed Servant Issue:

Both Parent Corporation and Laars, Inc. asserted that they were entitled to judgment as a matter of law on the ground that they were each Mr. Whitley's borrowing employer. In support of these claims, the defendants cited the holding in LaVallie that one who contracts for the services of a temporary employee is entitled to the protection of the workers' compensation bar. Our response required a closer look at the workers' compensation immunity statute and a closer look at the two defendants.

The issue was whether Parent Corporation and Laars, Inc. were entitled to immunity from suit under R.S.A. 281-A:8, I(a). That statute, which is part of New Hampshire's comprehensive Workers' Compensation Act, states that an "employee" cannot sue his "employer." The Workers' Compensation Act defines the term "employee," and in doing so, it sets the test to be applied.

The Act defines the term "employee" as:

[A]ny person in the service of an employer subject to the provisions of this chapter under any express or implied, oral or written contract of hire except a railroad employee engaged in interstate commerce whose rights are governed by the Federal Employers' Liability Act.4

Thus, as the court explained in LaVallie, an employee is "any person in the service of an employer... under any express or implied, oral or written contract of hire."5

The workers' compensation statute clearly conditions the finding of an employment relationship on the existence of an express or implied contract of hire. "It is a basic precept of statutory construction that the definition of a term in a statute controls its meaning."6 Accordingly, the courts may not modify, through judicial construction, the legislature's explicit definition of the term as it is set forth in the statute.7 This matter then became one of statutory construction.

In New Hampshire, the Workers' Compensation Act is liberally construed "in order to give the broadest reasonable effect to its remedial purpose."8 This means that all reasonable doubts are to be resolved in favor of the injured worker.9 It is not surprising, therefore, that the New Hampshire Supreme Court has:

  • Taken a "restrictive view of who is an 'employer' and therefore exempt from suit."10;
  • Recognized a presumption in the borrowed servant context in favor of the continuance of a worker's general employment11; and
  • Recognized a presumption in favor of the preservation of an injured worker's common law right to sue those responsible for his injuries.12

The foregoing demonstrates that the statutory definition of the term "employee" must be strictly construed in favor of the injured employee, and in favor of his common law right to sue those responsible for his injuries. By its explicit terms, the statute makes the existence of an express or implied contract of hire a threshold requirement. If this were not so, the statute would simply define an employee as one in the service of an employer. The legislature's use of the phrase, "under any express or implied, oral or written contract of hire" cannot be ignored.13

The legislature's emphasis on the existence of a contract of hire is in keeping with the law throughout the country. For example, in his treatise on workers' compensation law, Professor Larson explained that the first question of all is: Did the worker make a contract of hire with the special employer? If this question cannot be answered 'yes,' the investigation is closed, and there is no need to go on into tests of relative control and the like.14

In Appeal of Longchamps Electric15, the New Hampshire Supreme Court quoted with approval Professor Larson's explanation of why the existence of a contract of hire is a mandatory prerequisite:

This must necessarily be so, since the employee loses certain rights along with those he gains when he strikes up a new employment relation. Most important of all, he loses the right to sue the special employer at common law for negligence; and when the question has been presented in this form, the courts have usually been vigilant in insisting upon a showing of a deliberate and informed consent by the employee before employ- ment relation will be held a bar to common law suit.16

In Mr. Whitley's case, the defense did not assert that there was an express contract of hire, so the threshold question was whether Mr. Whitley entered into an implied contract of hire with either of the defendants.

In LaVallie, the court faced the question of how to determine whether a temporary worker had entered into an implied contract of hire with his employer's client company. After reviewing the options, the court adopted a multi-factor test set forth in the Restatement of Agency and New Hampshire Department of Labor rules. However, in that case, there were no special circumstances calling into question the very ability of the parties to enter into an implied contract of hire. For example, unlike the temporary worker in LaVallie, Mr. Whitley had signed a document expressly telling him that he was not an employee of Parent Corporation. In addition, since he understood that the facility was a Parent Corporation facility, Mr. Whitley was completely unaware that Laars, Inc. even existed, much less that it actually owned the facility and the equipment he was working with and that it employed the regular-status workers.

As Professor Larson emphasized, when the facts clearly establish the absence of a contract of hire, there is no reason to go into the Restatement test adopted in LaVallie.17 Thus, in light of the special circumstances present in Mr. Whitley's case, we contended that LaVallie was not controlling. Instead, the sole question was whether the defendants could demonstrate the existence of a contract of hire.

Parent Corporation claimed that it had entered into a contract of hire with Mr. Whitley despite the fact that it had required him to sign the Temporary Status Employee Waiver. We argued that the waiver established both that there was no express contract of hire and that there was no implied contract of hire. In support of this argument, we cited Swanson v. White Consolidated Industries, Inc., a similar case in which the Eighth Circuit ruled that, where there is an express contract denying the existence of an employee-employer relationship, the defendant cannot argue that there was an implied contract of hire in order to obtain immunity from a third party lawsuit.18

In Swanson, the trial judge initially ruled as a matter of law that the injured temporary worker was not an employee of the company that contracted for his services. The court of appeals reversed finding that a question of fact existed. On remand, the trial judge instructed the jury that it could find that there was an express contract between the parties establishing that the plaintiff was not an employee. The jury found this to be the case and the judge ruled that this determination precluded a finding that there was an implied contract of hire. On appeal for the second time, the Eighth Circuit held that the express contract issue was properly presented to the jury and that "the jury's finding precludes the defendant... from having an implied contract that the plaintiff was an employee..."19

The Eighth Circuit upheld the express contract finding in Swanson even though there was no explicit written contract between the worker and the hiring company like there was in Mr. Whitley's case. Instead, the court focused on language printed on the time sheets the worker used. In any event, the holding in Swanson that an express disclaimer of employment obviates the need to consider whether an implied contract exists is not surprising since "an implied contract cannot contradict the express terms of a written contract."20

The fact that an implied contract cannot be used to contradict an express contract is supported by settled New Hampshire law.21 In addition, it is a fundamental principle of New Hampshire law that "the parties to a contract freely and openly entered into are bound by its terms."22

New Hampshire has long recognized that "as a matter of efficiency and freedom of choice, parties should be able to contract freely about their affairs."23 "Under this rule, parties may bargain for various levels of risk and benefit as they see fit."24 Having recognized the freedom to contract, it follows that contracts should be enforced as they are written.

The courts cannot make better agreements for parties than they themselves have been satisfied to enter into or rewrite contracts because they operate harshly or inequitably. It is not enough to say that without the proposed implied covenant, the contract would be improvident or unwise or would operate unjustly. Parties have the right to make such agreements. The law refuses to read into contracts anything by way of implication except upon grounds of obvious necessity.25

As the Vermont Supreme Court recently explained, "it can hardly be equitable to impose a contract on the parties that completely undermines the contractual relationships that the parties themselves have created."26

The bottom line, we argued, is that Parent Corporation made a business decision to use the Temporary Status Employee Waiver to ensure that temporary workers like James Whitley did not consider themselves to be employees. If Mr. Whitley had not been involved in this accident and instead had attempted to obtain benefits under a Parent Corporation employee plan, Parent Corporation would have surely used that document to avoid paying. It cannot have it both ways. "By so contracting as to avoid employer status, [Parent Corporation] retained third party status and the legal liability that goes with it."27

Parent Corporation was unable to cite a single case in which a court has ruled that an injured worker was prohibited from suing a company even though that company made him sign a document prior to the accident stating that he understood he was not the company's employee. We argued that, since the Temporary Status Employee Waiver established the absence of an express or implied contract of hire between Mr. Whitley and Parent Corporation, there was no need to continue to the LaVallie test and that Parent Corporation's assertion of the borrowed servant defense failed as a matter of law.

Laars, Inc. also argued that it had entered into an implied contract of hire with Mr. Whitley. However, it was undisputed that Mr. Whitley did not know that Laars, Inc. even existed. He was told, and he accordingly believed, that he was working at a Parent Corporation plant. He had never heard the name "Laars, Inc." Similarly, the temporary agency staff had never heard of "Laars, Inc." In fact, the temporary agency's on site manager at the plant, who was present at the facility five days a week for approximately eight months, testified that she had not heard of Laars, Inc.

In short, there was no evidence whatsoever that Mr. Whitley was aware that: 1) the workers training him were employed by Laars, Inc.; 2) the facility itself was owned by Laars, Inc.; or 3) the equipment and tools he used were owned by Laars, Inc. Counsel only learned of Laars, Inc.'s existence when we checked property ownership records after Mr. Whitley was injured and found that Laars, Inc. owned the facility. We think that the law supported our argument that Mr. Whitley could not have entered into an implied contract of hire with Laars, Inc. under these circumstances.

"[I]n the 'lent servant' situation, it is a well-established rule that an employee cannot have an employer thrust upon him against his will or without his knowledge."28 The reason for this was explained by the New Hampshire Supreme Court in the Longchamps case where the court quoted Professor Larson for the proposition that the existence of an employment relationship requires "deliberate and informed consent by the employee" specifically because the existence of such a relationship determines whether or not the worker can sue when he is injured.29

The Washington Supreme Court's unanimous opinion in Fischer v. City of Seattle is directly on point. In that case the worker was hired by Standard Stations, Inc. which, unbeknownst to him, had an arrangement with an affiliated corporation, Western Operations, Inc., that purported to transfer his employment to Western.30 When he was injured, he sued Western in tort, but his suit was dismissed by the trial court. On appeal, the state supreme court reversed:

The plaintiff... filed an affidavit stating he had no knowledge of the agreements or relation between Standard Stations and Western Operations; he believed his employer to be Standard Stations only. There is no indication in the record, that he, in any way, consented to an employee relationship with Western Operations. Thus, the trial court erred in granting summary judgment to Western Operations and in denying the plaintiff's motion for summary judgment made for the purpose of striking Western Operations' affirmative defense.31

We believed that Mr. Whitley's case was even stronger than Fischer because, although Mr. Whitley understood that he was working at a Parent Corporation facility, he had been told directly that he was not a Parent Corporation employee. Thus, unlike Mr. Fischer who knew he was an employee of the related company, Mr. Whitley did not believe that he had entered into an employment relationship with Parent Corporation, much less with its undisclosed subsidiary. At all times, he believed that he was employed by the temporary agency.

Once again, the defendants were unable to cite a single case in which an injured plaintiff was held to have entered into an employment relationship with a company he did not know existed. The law appeared essentially one-sided to us.32

Early on in the case we made a tactical choice to ask the court to enter summary judgment in our favor striking both defendant's borrowed servant claims. After allowing the defendants time to conduct additional discovery, the court ruled that the record was not sufficiently developed to permit an informed decision as to whether either defendant was entitled to immunity. The judge noted, however, that he expected that at least one of the two would probably have immunity.

Discovery continued in the case and, after Mr. Whitley passed away, the defendants filed their own motion for summary judgment asking the court to rule that they were both entitled to judgment as a matter of law. While the motion was pending, both parties agreed to mediate the case prior to the court ruling. The defendants ultimately agreed to pay $6,825,000 to settle the case. As a result, we never got a definitive ruling. However, the defendants' willingness to pay this sum of money indicates their level of confidence in the borrowed servant defense.

IV. Our Prior Cases:

We had been attempting to chip away at the borrowed servant defense for several years before the Whitley case. We represented the injured worker in Longchamps and were able to convince the Supreme Court that employee consent is a significant factor in determining whether or not an employment relationship has been entered into. As is detailed above, the Longchamps decision turned out to be critical to our arguments in Whitley that LaVallie was no longer controlling.

We also represented the plaintiff in Singh. In that case, we were able to convince the Supreme Court that a sister corporation of the injured worker's employer was not entitled to claim immunity under the borrowed servant doctrine. This was true even though the individual supervisors who caused the accident were the plaintiff's co-employees under the borrowed servant rule and were therefore personally immune from suit. Despite this, the court held that the corporate employer of the supervisors was subject to liability based on their conduct.33 The court concluded that the corporation which employed the supervisors should not "escape responsibility for the risks incident to the conduct of its business without at the same time conferring any reciprocal benefit to the workers' compensation scheme."34

We could not have had the success we did in Whitley if it were not for our efforts in Longchamps and Singh. Thus, while it may seem at times to be a fruitless effort, it is vitally important for all of us to constantly test what may appear at first blush to be settled law.

V. Conclusion:

James Whitley's case proves that LaVallie does not always bar a temporary employee from suing the company that contracted for his services. However, it reinforces a more universal lesson: Whether or not the injuries are as significant as the ones Mr. Whitley suffered, you are doing your client a disservice if you fail to carefully examine the corporate relationships that may be below the surface of an otherwise simple employment relationship. Oftentimes you must be both relentless and ingenious in these efforts, but in our experience they frequently turn up something significant. The client deserves nothing less.

Endnotes

  1. 135 N.H. 692 (1992). . 135 N.H. 692 (1992). 
  2. See Singh v. Therrien Management Corporation, 140 N.H. 355 (1995); Appeal of Longchamps Electric, 137 N.H. 731 (1993).
  3. In deference to a partial confidentiality agreement, we will identify one of the defendants as "Parent Corporation."
  4. R.S.A. 281-A:2, VI(a).
  5. LaVallie, 135 N.H. at 694-95.
  6. Manchenton v. Auto Leasing Corporation, 135 N.H. 298, 303 (1992).
  7. See id.
  8. Appeal of Cote, 139 N.H. 575, 578 (1995).
  9. See id.
  10. Stevens v. Lewis, 118 N.H. 367, 370 (1978).
  11. See Singh v. Therrien Management Corporation, 140 N.H. 355, 358 (1995) (citing 1B Larson §48.14).
  12. See Elliott v. Public Service Company of New Hampshire, 128 N.H. 676, 681 (1986).
  13. See Marcotte v. Timberlane/Hampstead School District, 143 N.H. 331, 339 (1999) ("The legislature is not presumed to waste words or enact redundant provisions and whenever possible, every word of a statute should be given effect.").
  14. A. LARSON, WORKMEN'S COMPENSATION LAW § 67.01 at 67-2 (1999).
  15. 137 N.H. 731 (1993).
  16. Id., 137 N.H. at 735 (quoting Larson § 48.12 , at 8 409 to 8 410).
  17. See LARSON § 67.01 at 67-2 (1999).
  18. See Swanson v. White Consolidated Industries, Inc., 77 F.3d 223, 225-26 (8th Cir. 1996).
  19. Id., 77 F.3d at 225-26.
  20. Schloss v. Sick Optic Electronic, Inc., 1996 WL at *2 (N.D.Cal. 1996). In addition, it is black letter law that "if an express contract between the parties is established, a contract embracing the identical subject matter cannot be implied..." 17 Am. Jur.2d Contracts § 14 (1991). Put another way, "[w]here there is an express contract, the parties thereto cannot abandon it and resort to an implied one, but the contract as made must be the measure of their respective rights and liabilities." Id.
  21. See Edgerly v. Hale, 71 N.H. 138, 150 (1901) ("There being an express promise in regard to that matter, one cannot be implied.").
  22. Lowell v. U.S. Savings Bank, 132 N.H. 719, 725 (1990).
  23. Barnes v. New Hampshire Karting Association, Inc., 128 N.H. 102, 106 (1986).
  24. Id.
  25. Hobin v. Caldwell Banker Residential Associates, Inc., 144 N.H. 626, 631-32 (2000) (quoting Walnut Creek Pipe Distrib. v. Gates Rubber Co. Sales Div., 39 Cal. Rptr. 767, 771 (Ct. App. 1964)).
  26. D.J. Painting, Inc. v. Baraw Enterprises, Inc., 776 A.2d 413, 419 (Vt. 2001).
  27. M.J. Daly Company v. Varney, 695 S.W.2d 400, 403 (Ky. 1985), overruled on other grounds, U.S. Fidelity & Guaranty Company v. Technical Minerals, Inc., 934 S.W.2d 266 (Ky. 1996).
  28. Stelter v. Department of Labor and Industries, 27 P.3d 650, 652 (Wash.App. 2001) (quoting Fischer v. City of Seattle, 384 P.2d 852, 855 (Wash. 1963)).
  29. See id., 137 N.H. at 735. See also Murray v. Union Railway Company, 127 N.E. 907, 907 (N.Y. 1920) ("employment, like any other contract, presupposes understanding. The new relation cannot be thrust upon the servant without knowledge or consent.... Common law rights are not lost by stumbling unawares into a new contractual relation.").
  30. See id., 384 P.2d at 852-53.
  31. Id., 384 P.2d at 855-56 (emphasis in original).
  32. See Murray (Cardozo, J.); Fischer; Latham v. Technar, Inc., 390 F.Supp. 1031, 1039 (E.D.Tenn. 1974); Stelter; Larson, §67.01, at page 67-4.
  33. Singh, 140 N.H. at 358 (quotations omitted).
  34. Id.