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If one of your employees is injured while working, workers' compensation insurance is the usual means by which the injured employee would be compensated. Workers' compensation is a form of mandatory, no-fault insurance. As long as the employee was injured during the course of his or her employment, he or she is assured of obtaining workers' compensation benefits without the need to prove there was negligence by you even if the injury was the fault of the injured employee or other parties.
Workers' compensation represents a quid pro quo: The employee is entitled to workers' compensation benefits to compensate for injuries and lost wages without having to establish negligence by you, and your liability is limited to payment of workers' compensation insurance benefits. In return for the employee's assurance of receiving compensation when there is an accident without demonstrating any fault, the employee is precluded from seeking additional compensation from you. In return for you providing workers' compensation insurance, you gain immunity from a tort liability claim from the employee unless there is evidence you intentionally caused the injury.
But what happens if you do not have workers' compensation insurance? And what if an injured employee, dissatisfied with the amount of workers' compensation recovery, believes a general contractor, upstream subcontractor or building owner is at fault for the accident? Can the injured employee, after receiving workers' compensation benefits, sue other parties?
Statutory employer rule
The answers to these questions lie in the statutory employer rule, which provides, in the context of a construction project, that a general contractor or upstream subcontractor is deemed to be the employer of downstream subcontractors' employees for workers' compensation purposes.
So if you are working as a subcontractor on a new construction project, the general contractor would be your employees' statutory employer. And if you retained a subcontractor to remove ballast, install lightweight insulating concrete, remove and replace rooftop-mounted mechanical equipment, or perform any other task that was part of your contractual obligation, you would be the statutory employer of the subcontractor's employees.
The statutory employer rule is a function of individual state statutes and court decisions. Although states differ in how they apply the rule, virtually every state has adopted some form of the statutory employer concept as a part of its workers' compensation system. The common feature is that general contractors (sometimes referred to as principal contractors) and upstream subcontractors (sometimes referred to as intermediate subcontractors) will be required to provide workers' compensation insurance benefits for downstream contractors' injured employees if the employees' immediate or direct employers did not obtain workers' compensation insurance.
By operation of state statute, a statutory employer is compelled to provide workers' compensation insurance to remote employees (employees who do not work directly for the statutory employer).
For example, suppose you retained a subcontractor to install shingles on a small portion of a large roofing project and an employee of the subcontractor falls from the roof and is injured. Even though you requested and may even have received a certificate of insurance from your subcontractor indicating the subcontractor had workers' compensation insurance, you learn after the accident that, as a result of your subcontractor's failure to make a premium payment, your subcontractor did not have a workers' compensation policy in effect at the time of the accident.
As the statutory employer, your workers' compensation insurance carrier would have to provide benefits to the injured worker, who would be considered your statutory employee even though he or she was not directly employed or paid by you.
You or your insurance carrier would be entitled to recover the benefits that were paid to the injured employee from the subcontractor. Although a statutory employer usually is allowed to seek financial redress against the party directly responsible for providing workers' compensation benefits, this right often is of little value because it depends on the financial solvency of the party who was supposed to provide workers' compensation insurance.
The rule's objectives
The statutory employer rule's historical purpose is to prevent a business owner or employer from avoiding liability for workers' compensation insurance by subcontracting work to insolvent or irresponsible parties rather than hiring employees directly for whose injuries the employer would be responsible. The concern was that an employer, rather than hiring an employee to perform a task, would retain an independent contractor and be able to avoid workers' compensation liability.
Currently, a primary objective of the statutory employer rule is to make workers' compensation coverage available to as much of the work force as possible so injured workers who otherwise might not receive compensation for work-related injuries will have coverage.
The rule's effects
The statutory employer doctrine becomes critical in two situations. First is the situation when a downstream subcontractor, for whatever reason, does not have workers' compensation insurance to respond to claims from direct employees. In this circumstance, the upstream contractor, if deemed to be a statutory employer, has the responsibility to provide workers' compensation coverage.
The other situation where statutory employer status may apply is when a downstream subcontractor's employee, after receiving workers' compensation benefits, seeks to recover additional damages from an upstream contractor whose negligence he or she alleges was the cause of his or her injuries.
Are upstream contractors subject to lawsuits? In most states, they are not because of the statutory employer doctrine. Just as an immediate employer who provides workers' compensation benefits to a direct employee is immune from a tort suit, the law in many states is that statutory employers also enjoy tort immunity. As a result, an injured worker is legally precluded from prosecuting a lawsuit against a statutory employer even if the worker alleges his or her injury was the statutory employer's fault.
Tort immunity
Statutory employer immunity is significant and can be enormously financially beneficial if and when an injured worker seeks to pursue a civil suit alleging an injury was an upstream contractor's fault. As statutory employers, upstream contractors enjoy tort immunity and cannot be sued for negligence by injured remote employees.
In most states that grant statutory employer immunity, statutory employers are entitled to tort immunity even though they may not have paid any workers' compensation benefits. Usually, an injured employee's direct employer will have provided workers' compensation benefits. Nevertheless, an injured employee may seek to recover additional damages beyond workers' compensation and file a negligence suit against upstream contractors.
In many states, general contractors and other upstream contractors who are statutory employers can gain a dismissal from a suit based on statutory employer tort immunity.
Often, it is not the payment of workers' compensation benefits by an upstream contractor that triggers the tort immunity shield. Instead, the upstream contractor's potential liability for workers' compensation benefits confers tort immunity to the statutory employer regardless of whether he or she has incurred any actual liability to the injured remote employee.
In many states, the effect of the statutory employer rule is to make workers' compensation an injured worker's exclusive remedy against all upstream contractors, not just the exclusive remedy against a direct employer.
Picture yourself in the following scenario, and you can see how the statutory employer rule can reduce your potential liability to indemnify a general contractor.
Suppose you are working for a general contractor and your employee is injured. Your employee recovers workers' compensation benefits from your carrier but also files a lawsuit against the general contractor, claiming the general contractor's negligence caused the injury.
Depending on the contract's indemnification provision, you may be obligated to indemnify the general contractor for the costs of defending the suit brought by your employee and damages assessed against the general contractor arising out of or relating to your work. If you invoke the statutory employer rule, which would mean the general contractor was the statutory employer of your employees, the suit may be dismissed and your indemnification liability would be minimal.
Even if a state's workers' compensation statute does not expressly say a statutory employer is entitled to tort immunity, there may be court decisions to that effect.
In the 2004 case Russell v. Donnell, the Appeals Court of Massachusetts faced such an issue. In this case, the building owner hired a general contractor who hired a subcontractor, Imperial Custom Carpentry Inc., who in turn hired Eric Donnell as a sub-subcontractor to perform roofing work on a home building project.
Michael Russell, who was hired by Donnell, was injured when he fell from the roof. Because Donnell had no workers' compensation insurance coverage, Russell recovered workers' compensation benefits from Imperial Custom Carpentry's policy. Imperial Custom Carpentry was considered Russell's statutory employer per Massachusetts' statute.
Russell also filed a tort suit against Donnell, Imperial Custom Carpentry and the general contractor. The Massachusetts court ruled that in choosing to accept workers' compensation benefits from Imperial Custom Carpentry, Russell released the company from any common law liability for the accident.
Similar to other statutes, Massachusetts' workers' compensation statute states an insured employer who pays workers' compensation benefits to an injured worker is released from all common law claims or demands, if any, arising from the injury. However, Russell argued this provision applied only to direct employers and statutory employers were not released. The Appeals Court of Massachusetts disagreed, concluding the release language in the statute immunizes statutory employers as well as direct employers when injured workers accept compensation benefits from insured employers.
When facing a personal injury claim initiated by an injured worker, the first step should be to determine whether the state where the accident occurred grants immunity to a statutory employer and under what circumstances. Most states grant tort immunity to statutory employers, including Arizona, Arkansas, Colorado, Connecticut, Florida, Georgia, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Missouri, Nevada, New Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee and Virginia.
However, Illinois, Minnesota, Montana, New Jersey, Rhode Island and Wisconsin do not. These states generally allow a tort claim to be brought against an upstream party. In some states, such as New Jersey, even though a statutory employer may have paid workers' compensation benefits, the employer still can face a tort suit by the injured employee.
Assert immunity promptly
You should assert the statutory employer tort immunity defense as soon as a lawsuit is filed. Workers' compensation immunity generally is considered an affirmative defense that a defendant must plead in response to a plaintiff's complaint. Failure to raise the statutory employer immunity defense in a timely manner as an affirmative defense after the complaint is filed might be considered a waiver of the defense.
If you are a subcontractor, be sure to check whether a statutory employer immunity defense is available to the general contractor or other upstream contractors and assert the defense in the initial response to a suit filed by an injured worker.
Who is a statutory employer?
In addition to general contractors who retain subcontractors to perform work, intermediate subcontractors also can be statutory employers. When there is a hierarchal chain of subcontractors from the general contractor to the injured worker's employer, each contractor in the chain is a statutory employer in most states.
Primary responsibility is on the injured worker's direct employer, but if that employer cannot make payment, the injured worker moves up a step. The injured employee can obtain workers' compensation coverage from the subcontractor immediately above his or her employer or further up the ladder until he or she receives coverage.
By virtue of the vertical relationship between a general contractor, subcontractor and sub-subcontractor whose employee was injured, all the contractors remain potentially liable as statutory employers for payment of workers' compensation benefits. The contractor with workers' compensation coverage nearest to the uninsured employer in a chain of subcontractors usually will be responsible for paying benefits to the injured employee.
The application and value of the statutory employer rule to a downstream roofing subcontractor can be seen in the 2004 Florida 4th Circuit Court of Appeals' decision in the case Latite Roofing and Sheet Metal Company, Inc. v. Barker. In this case, the general contractor, Stiles Construction Co., Fort Lauderdale, Fla., hired Latite Roofing and Sheet Metal, Pompano Beach, Fla., to furnish and install a metal deck with lightweight insulating concrete and perform roofing work.
Latite Roofing and Sheet Metal subcontracted with East Coast Metal Deck, Delray Beach, Fla., for metal deck installation. As required by Latite Roofing and Sheet Metal, East Coast Metal Deck obtained workers' compensation insurance and provided Latite Roofing and Sheet Metal with a certificate of insurance. Timothy Barker, an employee of East Coast Metal Deck, was injured on the job and received workers' compensation benefits through East Coast Metal Deck and then sued a number of parties, including Latite Roofing and Sheet Metal, for negligence.
This case answered the question of whether a subcontractor who retains a sub-subcontractor is entitled to statutory immunity as a prime contractor. Because Latite Roofing and Sheet Metal made sure East Coast Metal Deck had workers' compensation coverage as required under Florida's workers' compensation statute, Latite Roofing and Sheet Metal was entitled to immunity as a statutory employer and could not be sued by Barker.
The statutory employer concept applies only upstream. The statutory employer doctrine does not apply to a suit in which a general contractor's employee claims his or her injury is a subcontractor's fault.
In the 1983 case Employers Insurance of Wausau v. Abernathy, the Florida Supreme Court ruled a general contractor's employee who was injured and received workers' compensation benefits from the general contractor could sue the subcontractor whose negligence allegedly caused the injury. Because the subcontractor had no duty to provide workers' compensation to the general contractor's employees, the subcontractor did not enjoy statutory employer immunity from suits alleging negligence brought by the general contractor's employees.
To reduce the likelihood of paying workers' compensation benefits to a subcontractor's employee as a result of the statutory employer doctrine, you should make sure all your subcontractors have workers' compensation insurance in effect during the duration of any work they perform for you. As part of this effort, always request a certificate of insurance with a notice of policy termination from each subcontractor you retain.
As long as each subcontractor you retain has workers' compensation insurance, you are likely to gain the benefit of statutory employer tort immunity without having to provide workers' compensation coverage to a subcontractor's statutory employee.
Under North Carolina's atypical version of the statutory employer doctrine, simply obtaining a certificate of insurance from a subcontractor indicating workers' compensation insurance has been obtained will excuse you from being liable to provide workers' compensation coverage to a remote injured worker.
Another issue
An issue that arises in some states, particularly outside a construction context, is whether a downstream contractor is in the same trade, business or occupation as the principal employer. Several states' workers' compensation statutes require contracted work to be closely related to the principal employer's primary business or trade for the statutory employer doctrine to apply. If a downstream contractor is in the same trade, business or occupation, the principal employer will be deemed a statutory employer. If not, the statutory employer rule will not apply.
For example, Virginia requires an injured remote employee to be engaged in the principal employer's trade, business or occupation at the time of the injury to invoke the statutory employer rule. In the 1996 case Yancey v. JTE Constructors, Inc., the Supreme Court of Virginia addressed the issue of whether a general contractor is the statutory employer of a supplier who delivers materials to a job site to be installed by others.
The Virginia Department of Transportation contracted with JTE Constructors Inc., Lorton, Va., to design, furnish and install a sound barrier wall on Interstate Highway 66. As the prime contractor for the project, JTE Constructors subcontracted with Reinforced Earth Co. (RECO), Vienna, Va., to design, manufacture and deliver sound barrier wall panels to the job site.
John Yancey, a RECO employee, was injured at the construction site while inspecting one of the 3-ton panels when a panel fell on him, severing his left leg below the knee. Yancey received workers' compensation benefits from RECO and filed suit against JTE Constructors alleging negligence. JTE Constructors argued workers' compensation was Yancey's exclusive remedy on the grounds that JTE Constructors was Yancey's statutory employer at the time of the accident.
Virginia courts distinguish between suppliers and contractors, finding an employee of a company supplying materials is not engaged in the trade, business or occupation of the general contractor when the employee is injured while delivering materials to the job site.
However, if the employee undertakes activities that incorporate the delivered materials into the construction project, the employee has gone beyond the activities required for delivery and engaged in construction activities. Then, the general contractor would be the statutory employ-er because at the time of the injury the employee was engaged in the general contractor's trade, business or occupation.
At the time of Yancey's accident, he was inspecting and patching materials RECO had delivered. Part of RECO's job was to repair sound panels that were damaged during transit. Because this activity was considered to be completing the act of delivery, Yancey was found not to be engaged in the trade, business or occupation of JTE Constructors at the time he was injured. Therefore, JTE Constructors was not Yancey's statutory employer and was subject to suit.
In contrast to its decision in the Yancey case, the Supreme Court of Virginia in the 2004 case Jones v. Commonwealth of Virginia ruled the University of Virginia was the statutory employer of an asbestos abatement company's employee.
In this case, the University of Virginia hired Waco Inc., Richmond, Va., to perform asbestos abatement work at one of the university's buildings. The work included removing electrical conduit. Robert Jones, a Waco employee, was injured as a result of receiving an electrical shock while attempting to remove electrical conduit after being informed by a university employee the electrical power had been turned off. Jones sued the university and its employee. The university argued it was Jones' statutory employer and immune from tort liability.
In ruling in favor of the university, the Supreme Court of Virgina said a government entity is the statutory employer with respect to any activity the government entity is authorized or required to perform because any such activity is considered the trade, business or occupation of a government entity.
The university was responsible for the care and preservation of all university buildings. Asbestos abatement performed by Waco and Jones was part of the maintenance of the university's buildings; therefore, Jones was involved in the trade, business or occupation of the university at the time of his injury; the university was his statutory employer; and Jones was precluded from pursuing a remedy in tort from the university and its employees.
Are owners statutory employers?
An issue that periodically arises with construction accidents is whether a property owner could be considered a statutory employer of downstream contractors. State statutes and court decisions interpreting the statutes must be examined to ascertain whether and under what circumstances a building owner could be properly classified as a statutory employer.
With respect to construction projects, most states usually do not recognize building owners as statutory employers. The typical principle incorporated in state workers' compensation statutes, such as the statutes in Florida, Georgia and New York, is that a property owner who hires an independent contractor is not considered a general contractor and would not be responsible for workers' compensation for an injured employee. To qualify for statutory employer status, the employer would need to be under contract to perform construction work.
The Georgia Court of Appeals faced this issue in the 1984 case Modlin v. Black & Decker Manufacturing Company. The property owner was Swift Textiles Inc., Atlanta, who had contracted with Potter-Shackleford Construction Inc., Greenville, S.C., as the general contractor, and Lockwood Greene Engineers Inc., Spartanburg, S.C., to construct a new textile plant in Columbus, Ga. Potter-Shackleford Construction subcontracted with Bahnson Service Co., Winston-Salem, N.C., to perform HVAC work. Jerry Modlin was a Bahnson Service employee who sustained spinal injuries following an electric shock from a hand-held drill and subsequent fall on Swift Textiles' premises.
Modlin received workers' compensation benefits from Bahnson Service and brought suit against Swift Textiles, Potter-Shackleford Construction, Black & Decker (the drill manufacturer) and Lockwood Greene Engineers. Swift Textiles claimed it was a statutory employer under Georgia's workers' compensation statute and was immune to tort liability. The Georgia Court of Appeals ruled the statutory employer doctrine applies to contractors and not owners unless the owner also serves as the contractor. Because the owner was not deemed a statutory employer, Swift Textiles was not responsible for workers' compensation benefits and not entitled to tort immunity and could be sued by Modlin.
Even if an owner pays for workers' compensation insurance, he or she usually is not considered a statutory employer under most states' workers' compensation statutes.
In the 1995 case Proctor & Gamble Cellulose Company v. Mann, Florida's 1st District Court of Appeals ruled Proctor & Gamble, Cincinnati, was not entitled to statutory employer immunity and could be sued even though it had paid the workers' compensation insurance premiums of the contractor whose employee was injured and the injured employee had received workers' compensation benefits.
In this case, Proctor & Gamble had entered into a construction, equipment and management agreement with E.M. Watkins & Co. to provide services and personnel at Proctor & Gamble's plant in Taylor County, Fla. Larry Mann, an E.M. Watkins & Co. employee, was injured when he fell through allegedly dilapidated and decayed flooring at the Proctor & Gamble plant. Mann sought and received workers' compensation benefits. He also filed suit against Proctor & Gamble.
In response, Proctor & Gamble argued it had paid E.M. Watkins & Co.'s workers' compensation insurance premiums and should be treated as a statutory employer. The Florida appellate court disagreed, ruling the statutory employer provision in Florida's workers' compensation statute applies only to contractors and that to be a contractor, an entity's primary obligation in performing a job or providing a service must arise out of a contract.
Because Proctor & Gamble was not a general contractor and not a statutory employer, it was not immune from suit.
The effect of a building owner not being considered a statutory employer is not only unfavorable to the owner who faces tort liability exposure but also can be disadvantageous to contractors who may be contractually obligated to indemnify the owner. Not being deemed a statutory employer, an owner is neither required to provide workers' compensation insurance for a contractor's employees nor immune from suit by a contractor's employees.
Part of the judicial reasoning for not granting statutory employer status to owners in construction situations is that an employee should not be precluded from having an opportunity to recover damages from an owner whose negligence allegedly caused the employee's injury.
Because an owner is subject to lawsuits and a contractor is likely to have signed a contract with an indemnification provision, be vigilant and routinely seek to limit your contractual indemnification obligation so you are not liable to indemnify an owner or any other party for injuries that are not your fault.
Nevada is a broad exception to the general principle that a property owner is not considered a statutory employer. In 2001, the Supreme Court of Nevada issued a decision in Harris v. Rio Hotel & Casino stating the property owner stands in the shoes of the general contractor and is immune from tort liability.
In this case, Billy Harris, an employee of the general contractor Marnell Corrao Construction Co., Las Vegas, was severely injured during construction of an addition to the Rio Hotel and Casino in Las Vegas. Harris recovered workers' compensation benefits from his direct employer, who was a licensed Nevada general contractor. Harris then filed a negligence suit against the Rio Hotel and Casino on the theory that scheduling demands created an atmosphere of recklessness at the job site.
Similar to most other states' workers' compensation statutes, Nevada's workers' compensation statute required employers to procure workers' compensation coverage; made workers' compensation the exclusive remedy for workers injured by accidents arising out of or during the course of employment; and adopted the statutory employer concept by stating principal contractors are deemed to be employers of subcontractors and independent contractors, as well as their employees.
But in its decision in the Rio Hotel and Casino case, the Nevada Supreme Court judicially expanded the statutory employer rule to cover owners, ruling if a landowner has contracted with a licensed principal contractor, the landowner is immune from suit as a matter of law for industrial injuries sustained during performance of the construction contract.
Louisiana's laws often differ from other states' laws, and the statutory employer rule fits this pattern. Per Louisiana's workers' compensation statute, a principal employer can be considered a statutory employer when he or she enters into a written contract with another party that recognizes the principal employer as a statutory employer.
For example, if an owner retains you to make repairs and the written contract contains an explicit provision stating the owner will be the statutory employer of your employees, the contractual provision usually will be enforced. Under Louisiana law, the contract provision establishes a rebuttable presumption of a statutory employer relationship between the principal and contractor's employees. Only if the injured employee could show your work was not an integral part of or essential to the ability of the principal employer to generate its goods, products or services would the contract provision be disregarded.
Warranty work
The statutory employer concept can apply to warranty work. In the 2002 Maryland case Lumpkins v. United States, the federal government hired a contractor to renovate boilers as part of a utility renovation project at the National Institutes of Health in Bethesda, Md. The contractor in turn hired a subcontractor. After a boiler had already been renovated and accepted by the government, an employee of the subcontractor was called after hours to perform warranty work. He was injured when a grated walkway gave way, causing him to fall.
The employee received workers' compensation benefits and sued the government and the government's construction manager. The court ruled the statutory employer concept applied to warranty work performed by the subcontractor subsequent to initial installation so a tort suit could not be maintained by the subcontractor's employee.
Wrapping up
You, your insurer and your attorney should be mindful of and look for potential application of the statutory employer rule and its tort immunity corollary whenever a lawsuit is brought by an employee of one contractor against an upstream contractor arising from a construction accident.
If a lawsuit is brought in a state that grants tort immunity to statutory employers, a personal injury suit against the statutory employer should be summarily dis- missed based on workers' compensation tort immunity. Given the requirement that a statutory employer is legally responsible to provide workers' compensation insurance to employees of downstream remote contractors if the immediate employer fails to do so, require receipt of current certificates of insurance from all downstream subcontractors and take steps to ensure subcontractors have workers' compensation insurance in place.
Stephen M. Phillips is a partner with the Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt. Brian P. McCormick, an attorney at the same firm, contributed to this article.
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