What Is a Special Employer?

The term special employer refers to a person, company, or another organization that receives an employee on loan from another employer. Corporations may need to hire employees at certain times and are able to borrow individuals from another company through a joint employer program. The original employer relinquishes responsibility for the employee, which means the special employer assumes the liability for the employee's actions. Despite this, the special employer doesn't become the employee’s actual employer.

Key Takeaways

  • A special employer is an employer who receives an employee on loan from another business.
  • Employers can take advantage of a special employer relationship through a joint employer program.
  • Employees have the same rights and protections under federal employment laws as any other worker in the U.S.
  • Worker liability for special employment has to be specified in a contract and has to meet certain conditions.
  • Employees in vertical joint employment are dependent on both employers while those in horizontal joint employment are employed by two affiliated companies.

Understanding Special Employers

There are times when employers may lack the adequate workforce to complete their day-to-day operations. This tends to happen when there's a labor shortage, when there aren't enough skilled workers in a specific industry, or when a company has many employees who are on leave. In these cases, businesses may let others borrow their employees for a period of time. This arrangement is known as a special employer relationship and is regulated under the borrowed servant rule.

The loaning business (the one that contracts out the employee to the special employer) is referred to as the general employer. When employees are transferred to the borrowing employer, the employee is considered to have an implied employment contract, even though they don't have a regular employer-employee relationship with the special employer.

The following apply under a special employer relationship:

  • The special employer can assume control over the employee in question
  • The original employee can still recall the employee or relieve them of the implied employment contract

A worker employed under a special employment arrangement has the same rights and protections under federal employment laws as any other worker in the U.S. As such, the Department of Labor has rules in place regarding special employment. When special employment exists, all of the employers are responsible, jointly and individually, for complying with the laws.

A special employment arrangement can be:

  • Vertical where the worker is economically dependent on both employers. An example is a worker employed by a staffing agency and assigned to work at a manufacturing plant.
  • Horizontal, in which the employee has two or more employers that are separate companies but have a relationship or affiliation with each other. The employee typically performs work for each company. For example, Jim and Bob are brothers and each owns a restaurant. Whether workers are hired by Jim or Bob, they typically work at both restaurants.

The Fair Labor Standards Act (FLSA) protects workers against certain unfair pay practices, including minimum wage and overtime pay.

Special Considerations

Just what constitutes a joint employer relationship and who qualifies has been the subject of much debate, depending on which party you ask. In fact, the joint employer program has gone through several changes under various administrations. Under President Trump, an employer was considered to be in a joint employment relationship if it met the following conditions:

  • It was able to hire or fire the employee
  • It supervised the employee’s work schedule
  • The employer determined the employee's salary/wages
  • It maintained the employee's employment record

These definitions were put in place in 2020 to clarify rules enacted by the Obama administration, which said labor rules negatively impacted certain types of businesses, including franchises and companies that outsource labor. Under then-President Obama, the Department of Labor put the onus on independent contractors and franchisees (rather than the overarching corporation) to take responsibility for paying employees the federal minimum wage and overtime pay.

In 2021, the Biden administration took steps to alter the program again. The DoL rescinded the Trump administration's final rule, which defined who could be classified as a joint employer—notably those operating in a franchise capacity. The agency announced the change in March 2021 and officially rescinded the rule in July.

Liability for Special Employers

In order for a special employer to be considered liable for damages or injuries sustained by an employee borrowed from a general employer, the following three rules must be met:

  1. An express or implied contract to hire the borrowed employee must be made, and the employee has to be aware of the contract details.
  2. The work being done is the work that the special employer typically does.
  3. The special employer controls the details of the work that the borrowed employee does.

In order for the special employer not to be held liable, an agreement between the general employer and the special employer would have to indicate that the general employer would provide insurance coverage to the employee being borrowed.

For example, the general employer would have to extend workers’ compensation coverage. The insurer of the general employer will hold the special employer liable for the actions of the employee on loan unless there was an exclusion endorsement that extended coverage to the special employer.

Example of Special Employers

Contracting firms, such as general contractors, staffing agencies, and different outsourcing companies, are commonly associated with borrowed employee arrangements. That's because they generally function as middlemen who liaise between workers and companies that want to hire individuals to have work done for them.