Many Australian businesses operate through multiple legal entities. One entity may employ staff, another owns assets, while a separate entity signs customer contracts or carries out day-to-day operations. It's a common arrangement, often created for tax, operational or administrative reasons. But while these structures can offer benefits, they can also create insurance risks that may go unnoticed.
What is internal labour hire?
Internal labour hire occurs when employees are formally employed by one company within a corporate group but perform work for another related entity. For example, a holding company may employ all staff before "hiring" them to an operating company.
While these arrangements can simplify payroll, HR and administrative processes, they can also create insurance exposures that are not always well understood – and lead to unexpected outcomes when a claim arises.
How internal labour hire arrangements impact General Liability and Casualty insurance
When internal labour hire arrangements are put in place, it's important to consider the legal relationship between each entity.
While companies within a corporate group may appear to operate as a single business, they are often separate legal entities. This distinction can become critical if an employee suffers an injury while working for another entity within the corporate group, as it may expose that entity to a Workers Compensation recovery action and a potentially substantial worker-to-worker excess.
Claims example: A warehousing company’s internal hire arrangements
A warehouse employee who is employed by Company A (the employing entity that provides Workers Compensation cover) but works exclusively under the direction and control of Company B (the operational entity). The employee suffers a serious injury while performing duties at Company B's premises and makes a claim under Company A's Workers Compensation policy.
The Workers Compensation insurer alleges that Company B failed to provide a safe system of work and seeks recovery against Company B. Although both companies form part of the same corporate group, Company B is treated as a separate legal entity and may face a claim arising from the worker's injuries and the Workers Compensation recovery action.
As a result, Company B may be required to claim under its General Liability policy to respond to the Workers Compensation recovery claim and may be exposed to payment of a worker-to-worker excess.
What are the biggest risks of internal labour hire arrangements?
One of the biggest misconceptions about internal labour hire arrangements is that insurers will automatically treat all entities within a corporate group as a single business. In reality, separate legal entities are often treated separately for insurance purposes, which can create issues when a claim is made.
One of the potential risks is that the insured may be required to pay a substantial worker-to-worker excess for an injury suffered by their "employee", despite that employee being covered under the Workers Compensation policy. This exposure can arise purely as a result of a decision to restructure the business and move employees between entities within the corporate group.
More potential risks include:
Multiple entities involved in a single incident can increase claims complexity and may result in multiple claims and excesses applying.
Cross-liability between related entities if two companies get treated as separate insured entities when a claim is made.
Inadequate or disjointed cover for separate entities resulting in the insurer requiring multiple claims and a slow, costly claims process.
These risks often remain hidden because the business operates smoothly day to day. It's only when a liability claim arises that the insurance implications become clear.
How to protect your clients
Internal labour hire structures can be problematic, as they can create unintended liability and insurance consequences where employees work for a related entity. The best way to reduce this exposure may be to avoid the arrangement altogether and seek professional advice before making any structural changes.
Where clients do have internal labour hire arrangements in place, it is crucial that brokers should review the business structure and relationship between entities, to identify which entity employs the workers and which entity could be legally liable if a claim arises. This can help ensure General Liability cover reflects the realities of the business and reduces the risk of unexpected policy excess.
To learn more about internal labour hire, or to get advice on whether coverage gaps may be present, get in touch with our Casualty team at casualty.au@cfc.com who are happy to support.
The information provided in this article is for general informational and educational purposes only. It does not constitute financial, legal, or insurance advice. While we strive to ensure the information is up-to-date and accurate, we make no representations or warranties of any kind regarding the completeness or reliability of this content. Always consult with a licensed insurance broker or qualified professional before making any insurance decisions.
