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Workers' Comp Legal Trends

Lawyers Get Big Payouts by Exploiting This Workers’ Comp Loophole

The casualty market could see increasing aggregation risk as more courts find a way around the exclusive remedy provision.  
By: | June 1, 2018 • 8 min read

During the first waves of the Industrial Revolution, workers endured grueling labor in life-threatening conditions. No safety regulations were in place, and employers had no legal obligation to pay workers a “fair” wage.

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Men, women and children toiled in factories that contained primitive machinery prone to breaking down and causing fires. Workdays of 16 hours a day were not uncommon in temperatures that could reach 130 degrees Fahrenheit.

Workers injured on the job didn’t have access or the established right to protections. They could sue their employer — if they could afford to — and start the process of lengthy court battles and high-at-the-time payouts, but usually they were left disabled and jobless.

Something had to be done to both protect workers and employers from the cycle of injury and liability. Thus, workers’ compensation coverage was born. And with it came the exclusive remedy.

The arrangement provided workers with compensation in the event of injury or illness while protecting employers from being held liable by workers injured on the job. Workers’ compensation became the sole remedy to address workplace injury.

“It was the early 1900s when workers’ compensation laws were enacted, allowing workers’ compensation coverage to be the exclusive remedy for how injured workers would be compensated for their medical costs and lost wages,” said Tony Tam, managing director, U.S. casualty placement leader, Marsh.

Mark A. Lies, labor attorney, Seyfarth Shaw LLP

“Before that, the worker had to go through the legal process to prove the employer was responsible and negligent.

“As a result of the enactment of workers’ compensation laws in the 50 states, injured workers for the most part can be made whole through workers’ compensation and exclusive remedy, and on the rare occasion, through employers’ liability, which requires the injured employee to prove the employer’s negligence.”

And “employers would rather have workers’ compensation apply than have an employee injury claim go to jury trial,” added Mark A. Lies, labor attorney, Seyfarth Shaw LLP.

“An employer could spend a lot of money if their employee retains a lawyer and files a lawsuit,” said John Denton, managing director, Marsh. “The exclusive remedy doctrine avoids a lot of expensive litigation.”

In the event a civil suit is brought forward, added Lies, employers frequently seek a motion to dismiss the claim. Typically, he said, the motion is granted, because the claim in issue is deemed to be covered by workers’ compensation and the exclusive remedy applies.

When Exclusive Remedy Doesn’t Apply

However, there are instances when exclusive remedy may not apply and employers face lawsuits regarding personal injury or other liability claims.

Negligence on the side of the employer is the biggest culprit.

“If the employer’s conduct is particularly egregious, if they are proven to have been grossly negligent or intentionally [exhibit] bad behavior, and depending on the state, an employee can sue their employer,” said Denton.

Likewise, third parties often aren’t covered under workers’ compensation and are exposed to suits by employees.

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“Sometimes an employer agrees to indemnify a third party and thus may be responsible for the third party if an injured worker sues them, which is referred to as an ‘action over,’ ” Denton said.

“Workers’ compensation benefits are fixed. [A worker] might choose to sue if they think they might get more through litigation.”

“In some states, an employee can bring a civil action against the employer and not have to show that there was an intentional act by the employer to injure the employee, rather by demonstrating there was a substantial probability of injury to the employee,” Lies said.

State regulatory and judicial environments are always changing. Underwriters failing to keep an eye on regulatory change surrounding exclusive remedy can leave themselves open to aggregation risk.

When it comes to looking at work-related injury and litigation, however, Lies noted there are “very few exceptions” to exclusive remedy.

“In workers’ compensation, you have to look state by state,” he said.

For example, Texas employers can non-subscribe or opt out of the workers’ compensation system and instead set up their own administration and benefit system if an injury were to occur. Tam said Oklahoma also has this option to non-subscribe or opt out.

“I don’t know if this is a wave [for other states to follow]. Those who do opt out tend to be large manufacturing and retail companies with a sizeable payroll in either of those states,” he said.

“They look at what they pay for workers’ compensation versus their historical experience and determine if managing their own claims, contracting with their own medical providers, etc., is more cost effective and better for their employees. The companies are doing due diligence by weighing their options.

“It’s a different way of financing this risk. And they might say ‘I don’t want to deal with the volatility workers’ compensation might have and opt out,’ or they might not want to lose the benefits of workers’ compensation and exclusive remedy,” Tam said.

The Legal Landscape

While few exceptions exist, state regulatory and judicial environments are always changing. Underwriters failing to keep an eye on regulatory change surrounding exclusive remedy can leave themselves open to aggregation risk.

The exclusive remedy provision holds firm in most cases, yet there are a handful of claims that bypass the provision all together and leave an employer vulnerable to general liability exposures.

In one instance, a California Supreme Court decision ruled that a workplace injury can be the source of a claim alleging unfair business practices. After a family member died on the job, a Wisconsin family pursued a tort claim against an employer instead of accepting death benefits.

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In Illinois, two teenagers were granted the right to pursue a civil suit against their father’s place of work. The teenagers suffered from birth defects caused by their father’s prolonged exposure to toxins at work. While the employer argued for exclusive remedy through workers’ compensation, the court ruled it didn’t apply.

Another case, this time in Texas, saw four workers injured while driving to work. The employer paid the workers to drive their personal vehicles for work-related transport, and while the driver pursued workers’ comp benefits, his passengers chose to file for personal liability.

“If we didn’t have the Workers’ Compensation Act, I don’t think the civil courts have sufficient resources to handle all of these workplace injury claims,” Lies said.

It’s the construction industry that seems to face the bulk of the of exclusive-remedy-turned-liability cases. One notable example, New York’s Scaffold Law, enacted in the 1990s, created a huge chink in the exclusive remedy armor.

Tony Tam, managing director, U.S. casualty placement leader, Marsh

“Employers’ liability claims in New York have increased in frequency,” due in part to the Scaffold Law, said Denton.

He described it as a “law that makes it very easy for employees to sue regardless of negligence if they fall even from a nominal height, with the claims ultimately borne by their employers as an ‘action over.’ ”

And although other states may flirt with statutes that alter the premise of an exclusive remedy, no state comes close to New York’s Scaffold Law in terms of the general liability exposures employers in the construction industry face.

“There is nothing like New York’s [Scaffold] Law, it is an absolute liability situation,” said David Perez, an executive vice president, chief underwriting officer, Liberty Mutual Insurance Group. “There is no contributory negligence whatsoever.”

“New York is alone in that approach,” he said. “In fact, similar regulations have been repealed in every other state where they existed.”

The law holds owners, general contractors and other third parties potentially liable for fault liability or personal injury claims arising from injury. No amount of safety equipment, training or workplace controls will reduce a builder’s liability in the event an employee falls and pursues legal action.

Construction losses such as those exacerbated by New York’s Scaffold Law are part of a formula that sees pricing in casualty lines increasing in some areas.

“There are signs that the casualty market is turning,” said Tam.  “There are three or four areas we find difficult right now: auto and trucking, wildfires, opioids and New York construction.”

Outside of New York, third parties in the construction industry can take the brunt of liability actions.

Sometimes it comes down to the wording in a contract drawn up between a subcontractor and a general contractor. The language may state that the subcontractor waives its right to the exclusive remedy protections of the Workers’ Compensation Act, which would expose the subcontractor to a personal injury claim by its own employee.

In many of these cases, the subcontractor does not realize they waived their exclusive remedy protection until an employee injury occurs.

“We see potential waivers all the time,” Lies said.

One Step Ahead

In the event that an employee does pursue civil litigation, in some jurisdictions they still need to “prove the employer either had an intent to injure them or that there was substantial probability of injury. In many jurisdictions, employees are unable to meet this burden of proof and the employer has a good defense,” said Lies.

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In any case, there are ways to stay ahead of a workers’ comp claim turning into a personal injury or fault liability claim. “Make sure you have a very competent and enforced safety and health program to start,” Lies said.

“In addition, have people who are highly trained who can investigate such claims to see if they are valid and, if so, to provide all necessary medical treatment to the injured employee to limit the potential liability.

“To minimize losses, also have a diligent claims person monitoring the claim. Purchase workers’ compensation insurance from reputable insurers and closely follow the premium setting process.  Carefully review all contracts when dealing with third parties to avoid waiving your right to an exclusive workers’ compensation remedy.”

“Carefully follow developments with your own state legislature regarding changes to the state workers’ compensation law,” added Lies.

“Work with legislators and lobbyists to prevent revisions to the exclusive remedy provisions of the law.” &

Autumn Heisler is the digital producer and a staff writer at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Focus: Workers' Comp

Do You Have Employees or Gig Workers?

The number of gig economy workers is growing in the U.S. But their classification as contractors leaves many without workers’ comp, unemployment protection or other benefits.
By: and | July 30, 2018 • 5 min read

A growing number of Americans earn their living in the gig economy without employer-provided benefits and protections such as workers’ compensation.

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With the proliferation of on-demand services powered by digital platforms, questions surrounding who does and does not actually work in the gig economy continue to vex stakeholders. Courts and legislators are being asked to decide what constitutes an employee and what constitutes an independent contractor, or gig worker.

The issues are how the worker is paid and who controls the work process, said Bobby Bollinger, a North Carolina attorney specializing in workers’ compensation law with a client roster in the trucking industry.

The common law test, he said, the same one the IRS uses, considers “whose tools and whose materials are used. Whether the employer is telling the worker how to do the job on a minute-to-minute basis. Whether the worker is paid by the hour or by the job. Whether he’s free to work for someone else.”

Legal challenges have occurred, starting with lawsuits against transportation network companies (TNCs) like Uber and Lyft. Several court cases in recent years have come down on the side of allowing such companies to continue classifying drivers as independent contractors.

Those decisions are significant for TNCs, because the gig model relies on the lower labor cost of independent contractors. Classification as an employee adds at least 30 percent to labor costs.

The issues lie with how a worker is paid and who controls the work process. — Bobby Bollinger, a North Carolina attorney

However, a March 2018 California Supreme Court ruling in a case involving delivery drivers for Dynamex went the other way. The Dynamex decision places heavy emphasis on whether the worker is performing a core function of the business.

Under the Dynamex court’s standard, an electrician called to fix a wiring problem at an Uber office would be considered a general contractor. But a driver providing rides to customers would be part of the company’s central mission and therefore an employee.

Despite the California ruling, a Philadelphia court a month later declined to follow suit, ruling that Uber’s limousine drivers are independent contractors, not employees. So a definitive answer remains elusive.

A Legislative Movement

Misclassification of workers as independent contractors introduces risks to both employers and workers, said Matt Zender, vice president, workers’ compensation product manager, AmTrust.

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered.”

Misclassifying workers opens a “Pandora’s box” for employers, said Richard R. Meneghello, partner, Fisher Phillips.

Issues include tax liabilities, claims for minimum wage and overtime violations, workers’ comp benefits, civil labor law rights and wrongful termination suits.

The motive for companies seeking the contractor definition is clear: They don’t have to pay for benefits, said Meneghello. “But from a legal perspective, it’s not so easy to turn the workforce into contractors.”

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered in the eyes of the state.” — Matt Zender, vice president, workers’ compensation product manager, AmTrust

It’s about to get easier, however. In 2016, Handy — which is being sued in five states for misclassification of workers — drafted a N.Y. bill to establish a program where gig-economy companies would pay 2.5 percent of workers’ income into individual health savings accounts, yet would classify them as independent contractors.

Unions and worker advocacy groups argue the program would rob workers of rights and protections. So Handy moved on to eight other states where it would be more likely to win.

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So far, the Handy bills have passed one house of the legislature in Georgia and Colorado; passed both houses in Iowa and Tennessee; and been signed into law in Kentucky, Utah and Indiana. A similar bill was also introduced in Alabama.

The bills’ language says all workers who find jobs through a website or mobile app are independent contractors, as long as the company running the digital platform does not control schedules, prohibit them from working elsewhere and meets other criteria. Two bills exclude transportation network companies such as Uber.

These laws could have far-reaching consequences. Traditional service companies will struggle to compete with start-ups paying minimal labor costs.

Opponents warn that the Handy bills are so broad that a service company need only launch an app for customers to contract services, and they’d be free to re-classify their employees as independent contractors — leaving workers without social security, health insurance or the protections of unemployment insurance or workers’ comp.

That could destabilize social safety nets as well as shrink available workers’ comp premiums.

A New Classification

Independent contractors need to buy their own insurance, including workers’ compensation. But many don’t, said Hart Brown, executive vice president, COO, Firestorm. They may not realize that in the case of an accident, their personal car and health insurance won’t engage, Brown said.

Matt Zender, vice president, workers’ compensation product manager, AmTrust

Workers’ compensation for gig workers can be hard to find. Some state-sponsored funds provide self-employed contractors’ coverage.  Policies can be expensive though in some high-risk occupations, such as roofing, said Bollinger.

The gig system, where a worker does several different jobs for several different companies, breaks down without portable benefits, said Brown. Portable benefits would follow workers from one workplace engagement to another.

What a portable benefits program would look like is unclear, he said, but some combination of employers, independent contractors and intermediaries (such as a digital platform business or staffing agency) would contribute to the program based on a percentage of each transaction.

There is movement toward portable benefits legislation. The Aspen Institute proposed portable benefits where companies contribute to workers’ benefits based on how much an employee works for them. Uber and SEI together proposed a portable benefits bill to the Washington State Legislature.

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Senator Mark Warner (D. VA) introduced the Portable Benefits for Independent Workers Pilot Program Act for the study of portable benefits, and Congresswoman Suzan DelBene (D. WA) introduced a House companion bill.

Meneghello is skeptical of portable benefits as a long-term solution. “They’re a good first step,” he said, “but they paper over the problem. We need a new category of workers.”

A portable benefits model would open opportunities for the growing Insurtech market. Brad Smith, CEO, Intuit, estimates the gig economy to be about 34 percent of the workforce in 2018, growing to 43 percent by 2020.

The insurance industry reinvented itself from a risk transfer mechanism to a risk management mechanism, Brown said, and now it’s reinventing itself again as risk educator to a new hybrid market. &

Susannah Levine writes about health care, education and technology. She can be reached at [email protected] Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]