Editor’s note:  This post originally appeared on BakerHostetler’s Employment Law Spotlight blog.

When Washington Hospital obtained an insurance policy in 2003 to cover medical claims arising from acts by its employees, its insurer probably did not consider whether hospital employees included workers supplied by a staffing agency. It should have. The issue of whether a staffing agency nurse was a joint employee of the hospital turned into a $3 million liability.

In 2004, a staffing agency nurse assigned to Washington Hospital assisted with a caesarean delivery that resulted in injuries that left the mother wheelchair bound. The patient sued, and the hospital and the staffing agency’s insurer ultimately settled the case. Washington Hospital’s insurer, however, did not participate. The staffing agency’s insurer included a provision in the settlement agreement preserving its right to try to reduce its share of the settlement later by bringing new claims seeking to tap into any other insurance policy that might cover the incident.

In 2010, the staffing agency’s insurer exercised this right. It sued Washington Hospital’s insurer, alleging that the nurse was jointly employed by both the staffing agency and the hospital, and that, therefore, Washington Hospital’s insurance policy should also cover the loss. There was no dispute that the nurse was an employee of the staffing agency. The issue was whether she also was an employee of Washington Hospital. Its policy covered acts by full-time and part-time employees of the hospital, but it was silent as to what was meant by “employees.”

The court of appeals applied a common law test of “employee” to determine whether the nurse, though paid by the staffing agency, was also an employee of Washington Hospital. Interstate Fire & Cas. Co. v. Washington Hosp. Center Corp., et al. (D.C. Cir. July 18, 2014). In applying this test, the court evaluated whether Washington Hospital retained the right to control and direct the manner in which the nurse performed her work. The court ruled that it did retain that right and that the nurse was therefore an employee of both organizations, which left both companies’ insurers responsible in part for the loss.

The decision left Washington Hospital’s insurer liable for $3 million, based on the conclusion that the nurse fell within the definition of the full-time and part-time employees covered under Washington Hospital’s policy.

Joint employment liability is well-recognized in many contexts, including wage and hour law, disability discrimination and traditional labor law. Companies who retain labor through staffing agencies need to remember that even though these workers are employees of the staffing agencies, they may be deemed joint employees of the client company as well. In this case, the failure to foresee that possibility was a $3 million mistake.