NY Third Appellate Division Decision Precludes Coverage of a Non-Leased Employee Under a PEO

The Third Department Appellate Division —for the first time—held that an employee was not covered by a Professional Employer Organization (PEO) policy because she was not a leased employee.¹   In Brown v. Buffalo Transportation, the court ruled that the PEO and its carrier had met the burden of proof to show that the claimant was not a leased employee and was therefore not covered by the PEO policy. This burden was met by both the (1) production of a list of all leased employees, and (2) testimony of the employer witness.

The New York State Workers’ Compensation Board has waged a campaign to fabricate coverage for non-leased employees under the policies obtained by Professional Employer Organizations (PEOs). Under New York’s statutory framework, Professional Employer Organizations (PEOs) are liable for coverage under their workers’ compensation policies only for the employees they lease to their client companies on the date of the relevant accident. If a client company employs non-leased employees, then the client company is required to obtain a separate policy to cover those employees; over the last few years the New York State Workers’ Compensation Board has attempted to impose coverage under the PEO policy in the absence of another policy.

In a case decided in June of 2021, the Third Department affirmed the ability of a PEO to demonstrate that a claimant was a non-covered non-leased employee. In Matter of Gaylord v. Buffalo Transportation² the Court held that a PEO bore the burden of showing that a claimant was not a leased employee, and therefore was not covered by a PEO insurance policy containing the appropriate limiting language. Although in that case they found that the PEO had not met their burden of proof, they dismissed out of hand the Board’s reasoning that a PEO policy would cover non-leased employees if the client company failed to obtain a separate policy. In doing so, they laid out several possible options to meet that burden of proof:

1. Provide sworn affidavits that the claimant was not a leased employee.
2. Provide comprehensive lists of all leased employees showing that the claimant was not on the roster.
3. Attach a list of leased employees to the PEO policy provided by the insurer.
4. Establish that they only leased certain types of workers that did not include the claimant.

Chartwell Law handled the Third Department appeal after being transferred from prior counsel, and although liability was found in that claim we used the decision to implement a defense strategy to combat further imposition of coverage under PEO policies. The Third Department had given us the roadmap to win in these cases and we have used that to our advantage.

In the aftermath of Gaylord v. Buffalo Transportation we implemented the strategy of filing employee censuses to list all employees leased to a client company during the calendar year of an alleged accident, and then provided an employer witness to testify to the contents of that list. We used that testimony to show that our witness had reviewed all the employees leased in any capacity under the client leasing agreement, and that the claimant was not one of those employees.

Recently the Third Department Appellate Division issued a decision in Matter of Brown v. Buffalo Transp., Inc. which Chartwell had handled since its inception. This marked the first time that the Appellate Division held that a claimant was not covered by a PEO policy because they were not a leased employee.

Recently the Workers’ Compensation Board has attempted to again raise the bar to prevent coverage for non-leased employees under PEO policies. In Matter of Chateau GC LLC, 2022 NY Wrk Comp G2581160 the Board stated the following:

(1) the client is obligated to provide separate coverage for its non-leased employees;

(2) the PEO and its carrier (for the client's leased employees) must ensure that the client did indeed obtain and provide coverage to its non-leased employees, and must document which employees are leased to the client at any given point in time; and

(3) the employee will be found to be a leased employee who is covered by the PEO's carrier unless the PEO and its carrier prove that the claimant is a non-leased employee by providing evidence that the PEO and carrier demanded proof of coverage, a detailed list of all leased employees, with specific dates when leased employees started and, if applicable ended employment (a date-specific list), and evidence that the list was referred to or incorporated by the policy procured by the PEO for leased employees.³

In practice few if any PEOs would be able to meet this burden, and that standard has been used to fabricate coverage even in the absence of any legislation that imposes this heightened standard. Chartwell is currently pursuing additional appeals to the Third Department stating that this new standard is not only unsupported by the plain letter and intent of the Professional Employer Act but is also in direct conflict with that legislation.

With the huge win in Matter of Brown in our back pocket, Chartwell is confident that we have additional resources to dispute coverage for non-leased employees. Despite the Board’s efforts under the Matter of Chateau framework, we are confident that the Third Department will continue to hold that a PEO and its carrier may avoid coverage through competent evidence and witness testimony.

Having now argued the two most important PEO cases in NY, Gaylord and Brown, in which we successfully obtained a framework to avoid coverage and then implemented that framework, Chartwell remains the leading defense firm in New York to handle these matters.

Should you have any questions about coverage under PEO policies or the proper strategy to pursue denial under these policies, please contact one of our partners:

• Robert Baker, Esq.
• Adam Devine, Esq.
• Angel Gomez, Esq.
• Jason Lewis, Esq.
• Nicholas Switach, Esq.

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