STATUTORY EMPLOYERS, SPECIAL EMPLOYERS, AND WORKERS COMPENSATION
by Marvin Sahl, CLU
The long-standing controversy about independent contractor status continues. More and more employers are creating contracts without providing Workers Compensation coverage and other mandatory and voluntary fringe benefits. (These contracts may also be intended to eliminate the employer's responsibility for Social Security, Medicare, unemployment insurance taxes, and so forth).
Employment status can be used to get Comp benefits for a party whom the employer never intended to cover. An employer can also use employer status to defend against claimants' tort suits. Such litigation can easily name a number of parties as employers of the claimant.
Regulatory boards and courts cases will often look beyond the language of the employment contract to the SUBSTANCE of the employer-employee link to determine the applicability of Workers Compensation benefits. The nature of this relationship often depends on legal and regulatory distinctions between two types of employer: 1) 'statutory employers,' who place employees on their payroll, offer them fringe benefits, withhold employment taxes from their pay, and provide revenue and regulatory authorities with deduction reports; 2) 'special employers,' who borrow the services of an employee of another business for a specified time without providing fringe benefits or Workers Compensation coverage.
This article discusses the legal responsibility imposed on both types of employers for paying Workers Comp benefits.
STATUTORY EMPLOYERS: THE RULES OF THE GAME
In a typical statutory employer case, an employee of a contractor seeks compensation for a job-related injury from the contractor's employer or 'principal.' These situations occur most often in the building construction, renovation, and installation trades, although they can arise in other industries. The general contractor subcontracts all or part of the work to one or more subcontractors, but may still be liable for Workers Comp claims sustained by the subcontractor's employees.
One key to determining liability is to decide whether the arrangement between the parties is consistent with customary practice industry practice or is simply a device to avoid the potential liabilities of being an employer. According to the Larson Law of Workers Compensation Paragraph 29.14:
'The purpose of this legislation was to protect employees of irresponsible and uninsured subcontractors by imposing ultimate liability on the presumably responsible principal contractor. It is the principal contractor who has it within his power, in choosing subcontractors, to pass upon their irresponsibility and insist upon appropriate protection for their workers.'
This doctrine allows employees to obtain Workers Comp benefits when they're not available from the subcontractor. Thus, a general contractor may be liable for benefits (and premiums) arising from injuries by a subcontractor's employees.
CASES IN POINT
Statutes creating the 'statutory employer' classification have been upheld in a number of cases. For example, Curtiss v. GSX Corp., 774 P. 2d 873 (Colo. 1989) involved a claimant hired by a contractor who assigned him to work on a truck owned by GSX. While the claimant was working on the vehicle, the driver drove over the claimant's right foot, which was subsequently amputated. The claimant sued the first company (GSX), which responded that tort claims were barred because it was the statutory employer of the claimant at the time of the injury. The court held that GSX was an employer and thus immune.
In another case, a shop owner hired a builder to add an extension onto his establishment. The contractor hired a second contractor to purchase and install dry-cleaning machinery, including all necessary piping. When the machinery arrived, the second contractor hired the claimant to install the burners and hook up the pressing machines. The second contractor would pick up the claimant every morning and drop him off at the job site. The second contractor instructed the claimant on what had to be done and supplied all necessary materials. The claimant, an alcoholic, went out for two shots and a glass of beer on the day of his injury. Later, he fell while climbing a ladder.
The court held that the shop owner could not be the statutory employer of the claimant since the owner did not control the claimant's work. The second contractor, who hired the claimant, qualified as the statutory employer. That fact that the statute requires the general contractor to make sure that the subcontractor obtain Workers Comp coverage did not create an employer-employee relationship with the claimant.
In this situation the owner-principal hired the contractor. However, this did not place the burden on the owner of ensuring that Workers Compensation benefits were available to the claimant in the event the contractor failed to fulfill its statutory obligations-particularly since the claimant was not an employee of the contractor, but an independent contractor.
STATUTORY RULES PROTECT WORKERS
Another case illustrates how statutory employer rules can protect claimants. The claimant was employed by a stucco subcontractor. Since the employer had no Workers Compensation coverage, benefits could not be collected. The claimant could expect Workers Comp benefits from the general contractor, who carried insurance. The general contractor had a responsibility to ensure that subcontractors could pay, through insurance or otherwise, the Workers Comp benefits required by law. Since the contractor was liable as a statutory employer, it was not responsible for paying penalties resulting from the failure of the subcontractor to maintain the required insurance. It was responsible only for paying Workers Compensation benefits.
For an independent contractor to recover damages, work must fall within the scope of its normal business. An independent contractor may recover Workers Compensation benefits from a statutory employer, if the claimant can prove that his or her work falls within the statutory employer's normal course of business.
SAUCE FOR THE GANDER
Statutory employer status works both ways. Since a statutory employer may be potentially liable for the payment of Workers Comp benefits, it's entitled to assert the exclusive remedy shield provided by Workers Compensation laws against any subsequent tort action. This is true even if the statutory employer does not actually make a compensation payment to the claimant. (The Workers Comp carrier and the employer are indistinguishable in this type of case.)
The claimant seeking compensation benefits from a statutory employer is required to prove this status. Similarly, a company wishing to obtain immunity from tort liability under the exclusive remedy statute must prove statutory employer status.
CONSTRUCTION AND TRANSPORTATION
Statutory employer situations often arise in the construction industry. For example, a general contractor is building new homes. Since it has two officers, but no employees, it is not required to carry Workers Comp insurance. The actual construction of houses is subcontracted out. A subcontractor with employees, however, must show the general contractor proof that it carries this coverage.
While building a home, the general contractor hired the subcontractor to perform roofing work with payment to be based on the square footage of the completed roof. The subcontractor did not carry Workers Comp, and it was understood that he would not employ anyone. However, the subcontractor hired a worker to assist him: an experienced roofer who worked for another company but performed side jobs several times a year. This worker fell and was injured. The court held that he was an employee of the general contractor, not an independent contractor, based on the general contractor's right to control the claimant's work and to terminate the relationship at will. Thus the general contractor was a statutory employer required to pay compensation benefits but immune from tort liability.
BORROWING AND LENDING: SPECIAL EMPLOYERS AND THE BORROWED SERVANT DOCTRINE
The cases discussed here illustrate that tort immunity and the transfer of Workers Compensation obligations can arise in a variety of situations. Similar obligations may be generated under the 'borrowed servant' doctrine when multiple contractors or employers are working on a particular job when one contractor temporarily uses the employees of another to help complete the first contractor's work.
To be considered a 'borrowed servant,' a person's services must be loaned with his or acquiescence or consent. He or she must become wholly subject to the control and direction of the second employer, and free during the temporary period from the control of the original employer. Under the borrowed employee doctrine, if an employer to whom an employee is lent is a master of the servant at the time a negligent act occurs he becomes liable as a special employer. But if the lending employee retains control at the time of injury he would incur the liability as a general employer.
A borrower (or 'special employer') can be held liable for Workers Comp benefits arising out of injuries sustained by a borrowed employee only when:
- The employee has a contract of hire with the borrower (the contract need not be formal)
- The employee is performing tasks that are normally part of the work performed by the borrower
- The borrower has the right to control the details of the borrowed employee's work.
For a court to find that an employee has been borrowed, the employee must be aware of being borrowed-as having agreed to perform tasks for the borrowing employer. Without proof of this change in the employee's status and the creation of a new contract of hire for even a short period, the employee is presumed to have continued to work for the lending employer.
For the borrowing employer to be liable for Workers Comp benefits, it's necessary to show a transfer of control over the employee. It doesn't matter that the lending employer pays the employee.
A perfect example occurs when the borrowing employer rents a piece of heavy construction machinery from the lending employer and operator of that equipment. In this situation, an injury sustained by the employee should be the responsibility of the borrowing employer. This is true even when the borrower may pay a flat fee for the equipment and use of the operator.
In one case, one employer sued another for contributions to Comp benefits. Both employers carried Workers Comp insurance. Such a suit is permissible, as long as it doesn't delay the payment of benefits to the claimant.
A borrowing employer can be held liable for Workers Comp benefits if it exercises control over the claimant at the time of an accident. In this situation, the borrowing employer becomes a 'special employer' and the lending employer remains the claimant's general employer.
In another case, the claimant worked for a labor broker assigned to work for a power company. He claimed that he was injured because of the negligence of the power company in maintaining its premises. The power company had a detailed contract with the broker. It would notify the broker when it needed workers, and the broker, in turn, notified the union local to refer laborers to the broker. The claimant was sent to the steam plant, where he slipped while descending some steps alleged to be poorly illuminated. The claimant sued the broker to recover Compensation benefits, and brought a tort action against the power company. The court determined that since the power company contractually reserved the right of control and supervision over the work, it was a special employer of the claimant-and thus immune from the tort suit.
In a third case, the plaintiff was a personal attendant sent to work for an elderly woman under a contract between the woman and a temporary help agency. The woman was held immune from tort liability under the borrowed servant doctrine. The fact that the plaintiff was employed by the temporary agency removed the compensation exception from this claim, rendering the borrowed servant doctrine applicable.
For the borrowed servant doctrine to apply, the work performed by the claimant must fall within the scope of the borrower's normal business. If the borrower uses the borrowed help for casual work, such as odd jobs outside the borrower's normal business, immunity might not be available.
What's more, no immunity can be given to an alleged borrower if the borrower lacks control over the claimant's activities. This is particularly true when no temporary labor broker is involved and the claimant is an employee of a contractor working on the owner's premises. In such cases, it's necessary to find which party had control over the claimant at the time of the accident.
This is parallel to the statutory employer situation in which one considers whether the activity falls under the normal course of the borrower's business traditionally performed by the statutory employer.
FINAL THOUGHTS
Generally, little difference exists between the terms 'statutory employer' and 'special employer.' These classifications can mitigate the effects of various attempts to categorize individual workers as contractors or otherwise avoid paying Compensation or other employment benefits. On the other hand, they can provide statutory and special employers with immunity from tort liability under the exclusive remedy provisions. They can also benefit claimants by providing them with an additional source from which to recover job-related injury Workers' benefits.
As such, these classifications and their shifting of liabilities must be recognized and considered when a business plans for its Workers Compensation needs, establishes labor contracts, and deals with employer's liability and other tort liability claims involving workers.