Key Takeaways:

• The New York Third Department reaffirmed that Professional Employer Organizations (PEOs) and their carriers bear the burden of establishing that a claimant was not a covered employee under the applicable workers’ compensation policy.

• The court once again emphasized that employee rosters and payroll records alone are generally insufficient to establish exclusion from coverage.

• For the first time, the Third Department referenced a Workers’ Compensation Board rationale suggesting that the absence of evidence regarding separate coverage for non-covered employees may support a finding of coverage under a PEO policy.

As we have discussed in prior updates, the law surrounding workers’ compensation coverage disputes involving Professional Employer Organizations (PEOs) continues to evolve. The New York Third Department’s recent decision in Matter of Rodriguez v. Sky Materials Corp. adds another chapter to a line of cases that includes Gaylord, Cardona, Brown, and Fonseca.

The claimant in Rodriguez sustained injuries while working on a construction project. At issue was whether he was covered under a workers’ compensation policy procured by a PEO that maintained a client leasing agreement with the claimant’s employer. The PEO and its carrier argued that the claimant was not a covered employee and, therefore, not covered by the policy.

The Third Department disagreed and affirmed the Board’s determination that coverage existed. In doing so, the court continued its recent trend of broadly construing PEO workers’ compensation coverage where exclusion cannot be clearly established.

The court further noted that the policy broadly covered construction operations and did not contain a list of specifically named employees. Although the PEO presented testimony that the claimant was not listed on its client employee roster, the Board found that evidence insufficient to establish exclusion. In particular, the Board noted that there was no indication that the employee roster had been incorporated into the policy itself.

That portion of the decision is largely consistent with the Third Department’s prior rulings in Gaylord and Cardona, which similarly held that employee lists and payroll records do not, standing alone, establish that a claimant was excluded from coverage.

The more noteworthy aspect of Rodriguez is the court’s discussion of separate coverage for non-covered employees. The Board observed that the client leasing agreement required the client employer to maintain separate workers’ compensation coverage for non-covered employees and further noted that there was no evidence that PEO had sought proof of such coverage or that the client had obtained it. The Third Department specifically referenced that reasoning in affirming the Board’s decision.

This language is significant because it mirrors a trend that has appeared in several Board Panel decisions over the last several years. Those decisions have increasingly suggested that PEOs should be prepared not only to establish who was covered, but also to demonstrate efforts to verify that separate coverage existed for employees who were allegedly outside the leasing arrangement. Until now, however, the Third Department had seemingly not directly endorsed that rationale.

Importantly, Rodriguez does not expressly hold that PEOs have an affirmative legal obligation to monitor or verify separate workers’ compensation coverage for non-covered employees. Nor does the decision alter the framework established in Brown and Fonseca, where the Third Department found that PEOs successfully established exclusion through detailed contractual provisions, employee records, and testimony regarding enrollment procedures.

Accordingly, the practical approach for PEOs remains largely unchanged. Successful defense of these claims continues to depend upon maintaining a comprehensive paper trail, including the workers’ compensation policy, client leasing agreement, a detailed and exhaustive list of covered employees, and testimony explaining enrollment procedures and workforce status. Nevertheless, Rodriguez suggests that carriers and PEOs should also be prepared to address questions regarding separate coverage for non-covered employees when such issues arise.

Ultimately, Rodriguez serves as a reminder that courts remain willing to construe ambiguities in favor of coverage and that PEOs should continue to develop a thorough evidentiary record whenever covered employee status is disputed.

If you have questions about how this latest New York Third Department decision on PEO workers’ compensation coverage could impact your business, please contact:

• Dustin W. Osborne
• Or another member of the firm’s Workers’ Compensation or Professional Employer Organization teams