In an interesting case regarding employee classification, the Seventh Circuit found that a position was neither an employee, a leased employee, nor a contractor according to separate insurance policies that covered such classifications for purposes of theft and other fraud liability. So what was this “employee?”
See if you can follow along... The “employee” worked as a Vice President of Major Accounts for a company called Telamon Corporation that oversaw the sales of old or outdated AT&T telecommunications equipment. She oversaw what Telamon called its AT&T Asset Recovery Program. Her specific job was to remove old equipment and sell it in the aftermarket. The position was given a lot of authority that included operational oversight of Telamon’s facilities in the states of New York and New Jersey. She also had the authority to hire and fire Telamon’s employees, run meetings, and sign contracts on its behalf.
Abusing this authority, the “employee” stole Telamon’s profits to the tune of over $5,200,000. When this was discovered the “employee” was fired. She was also criminally convicted of wire fraud and tax evasion resulting in a prison term. As part of this penalty, she was also ordered to repay Telamon over $3.4 million dollars, but this money would never be re-paid.
Telamon filed claims with two of its insurers to be compensated for the loss. Travelers Casualty & Surety rejected Telacom’s claim because it alleged the employee was not really employed by Telamon. In fact, the Seventh Circuit found the company never made her an employee. Instead Telamon engaged her through a series of consulting agreements with her company, J. Starr Communications, the “employee’s” one-person company. Telacom created this relationship specifically to avoid an employer/employee relationship, and it lost on that basis.
If the “employee” is not an employee than it may be a leased employee of J. Starr Communications, right? Wrong. Her company, J. Starr Communications, was not set up to lease her or in other words was not a “labor leasing” firm. Therefore, this claim was also rejected by the court.
Telamon also had a second policy with another insurer, Charter Oak. This policy covered risks associated with physical loss, provided one of the following exclusions did not apply: "dishonest or criminal act by... employees (including leased employees), directors, trustees, authorized representatives or anyone... to whom you entrust the property for any purpose." (Court's emphasis).
Winner, winner chicken dinner? No, said the Judge that wrote the Circuit Court’s opinion. As stated above, the Court first determined that Telamon’s “employee” was not such and the first insurer (Travelers) did not have to pay. By doing so it also set the stage for the second insurer (Charter) to successfully argue that by virtue of Telamon’s authority bestowed to the “employee” and the fact that she was not on the payroll, she would fall under that insurers exclusion of person’s that were “authorized representatives.”
The Court believed that Telamon had been deliberately walking a line between employee and contractor and got caught trying to be too clever for its own good.
Source: Employer Outsmarts Itself And Loses Over $5 Million March 28 2017Article by Stephen M. Proctor Masuda, Funai, Eifert & Mitchell, Ltd.