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U.S. Department of Labor Futurework
  Trends and Challenges for Work in the 21st Century
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Flexible Staffing Arrangements

A Report on Temporary Help, On-Call, Direct-Hire Temporary, Leased, Contract Company, and Independent Contractor Employment in the United States

Susan N. Houseman
August 1999

9.3 Workers' Compensation

Each state requires that employers purchase workers’ compensation insurance, which provides benefits to employees in the event of an occupational injury. Coverage of workers tends to be fairly comprehensive, although state workers’ compensation laws often exempt domestic, farm, and other “casual” workers. Moreover, independent contractors, being self- employed, are not covered by these laws. One problem, particularly prevalent in the construction industry, is that companies reportedly will require workers to be "independent contractors" to avoid workers' compensation costs. When these workers become injured, they are reclassified as employees and file for workers compensation (see Montana Legislative Council, 1994).

A key issue in workers’ compensation is the misclassification of workers, particularly by temporary help and leasing agencies, which usually are responsible for purchasing workers’ compensation insurance for the temporary or leased employees. The insurance rate depends partly on the occupation in which the worker is classified. Some agencies allegedly misclassify workers in order to obtain lower rates. Although several states have taken steps to crack down on misclassification by leasing companies, little has been done to cut such abuse by temporary help agencies (Klein 1996).

A related problem is that typically the workers' compensation rate is based on experience rating of the leasing or temporary help agency. Allegedly, some leasing or temporary help agencies hire a minimal number of people for some period of time to establish a low rate and then move large numbers of leased or temporary employees into this operation. When the rate increases they close this "company" and move the employees into another such operation. Some have recommended that the workers' compensation rate be tied to the client company.20

(20) See KRA Corporation (1996), Clark (1997), and Montana Legislative Council (1994) for a discussion of these issues.

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