The hidden risks of outside contractors

July 7, 2005
The increased use of outside contractors to perform tasks once performed by company employees represents enormous risk from both a legal liability and OSHA compliance liability point of view.

With so many pressures, so much work and so little time to do it, it is difficult to even consider implementing programs designed to address the safety of outsiders in our facilities. Unfortunately, the legal and compliance liability climate we operate in doesn’t allow us to even think about ignoring this critical element of risk in our operations.

The increased use of outside contractors to perform tasks once performed by company employees represents enormous risk from both a legal liability and OSHA compliance liability point of view. In many cases, these contractors are performing dangerous tasks involving the maintenance and repair of machinery, equipment, and facilities. Their exposure to hazards is obvious to all involved in facilities management. Clearly these contractors are responsible and liable for their own actions and mistakes. However, you carry an equally large legal and compliance liability which many facilities management personnel are unaware of.

As our legal liability system seems to move us towards a “let’s find someone else to blame” society, facilities carry enormous liability from incidents involving the contractors who work in their facilities. Years ago, it was simply adequate to receive a certificate of insurance from each contractor who performed work in a facility. Today’s legal climate requires more to protect the interests of your company. When other parties can be sued, they will be sued. As an example of what can happen, an electrical contractor is replacing ballasts in your facility during normal business hours using an aerial lift. During movement of the lift, the electrician moves the lift into finished product staged on the floor causing the lift to tip and the electrician falling 20 feet to the floor below resulting in serious injuries. The injured electrician is covered by his employer’s workers’ compensation policy, but can also bring suit against your facility. His attorney may argue the placement of finished product on the floor was the contributing factor in the accident. Don’t be surprised if your customer is named in the same suit in the future for having ordered the product which caused it to be on the floor!

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The million dollar question (and when we talk about third party liability it really could be a million dollars!) is how do you protect your facilities against third party suits brought by outside contractors? The answer is commonly referred to as “risk transfer”. This process legally transfers your company’s liability to the contractor performing work at your facility. It is best to use a contract or properly worded purchase order for all contracted work, but the key to risk transfer is requiring your contractors to name your company as an “additional named insured” on their insurance policy. This is verified by obtaining a current certificate of insurance from the contractor showing the additional insured language. You should contact your company’s risk manager or insurance broker for more information on how to properly transfer risk to your outside contractors.

Facilities also have substantial OSHA compliance liability when outside contractors work in their facilities. In fact, OSHA specifically identifies these obligations in a number of different standards including:

  • Chemical hazard communication
  • Lockout/tagout
  • Confined space entry
  • Process safety management

These compliance obligations actually make sense. For example, it certainly seems reasonable to expect a facility which handles hazardous chemicals to inform contractor’s employees of the existence, location, and nature of chemicals to which they may be exposed. Lockout/tagout, confined space entry, and process safety management essentially deal with the careful coordination of facility owners and outside contractors when performing certain types of work in a facility. Facility owners are expected to coordinate maintenance and repair of facility equipment and machinery with outside contractors and to ensure lockout/tagout is handled by both facility and outside contractor. The same emphasis on communication and coordination is addressed in the confined space entry and process safety management standards.

Compliance liability can get a bit sticky; however, if a facility does not exercise due diligence to ensure an outside contractor is in compliance with their own OSHA compliance obligations. For example, OSHA would likely cite a facility owner for a confined space entry fatality involving an outside contractor if it was determined the contractor had no formal confined space entry program, procedures, or training. Your obligation actually extends beyond simply the coordination of the work which will be done. OSHA expects you as a facility owner and operator to do business with contractors who can demonstrate evidence of certain critical safety programs. As the “buyer” of these contracted services, you have the ability to demand such programs be in place as a condition of doing business with them. OSHA applies the same logic in regulating the relationship between general contractors and subcontractors on “multi-employer worksites”.

Managing these potential legal and compliance liabilities need not be a daunting task. Once established, transferring risk should be a fairly straightforward process and many insurance brokers will assist their clients with implementation and management of such programs. Unfortunately, you cannot legally transfer your facilities OSHA compliance liability. However, you can do several things which help shield you from OSHA compliance liability resulting from the actions of contractors working at your facility. The first step is to formally communicate your company’s commitment to safety, including safety of outside contractors working in the facility. Many companies use a contractor pre-qualification process which requires potential contractors to submit evidence of certain safety programs and safety performance demonstrated through OSHA injury incident rates and workers’ compensation experience modification rating. If these contractors truly respect your business, they will have no problem assembling this information and doing what it takes to maintain your trust and confidence.

Despite the frustration of a “find someone else to blame” legal climate, there are still methods you can use to limit your facilities legal and OSHA compliance liabilities. Your options are to take the actions necessary to protect the interests of your company or remain exposed and hope for the best. With enormous legal and compliance liability consequences, only the strong will survive. Those who do survive will have gained a unique and distinct competitive advantage by turning frustration into opportunity.