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Statutory Employment: Liability And A Right To Seek Reimbursement

September 05, 2014 BY Taylor Poncz

    In Georgia, the Workers’ Compensation Act was designed to protect and cover employees against injuries on the job. However, in certain cases, most predominantly those involving construction-related injuries, an employee may be hired by a direct employer who does not have coverage. In those instances, the direct employer, most often a subcontractor, simply may not have had coverage as a result of having fewer than three employees. O.C.G.A. § 34-9-8 was designed to provide coverage “up the ladder” in certain instances where a subcontractor/direct employer has no policy covering a loss. Where the contractor of the subcontractor is deemed liable for the injury of the subcontractor’s employee, the contractor is said to be the “statutory employer.”

O.C.G.A. § 34-9-8 provides in part,

(a)        A principal, intermediate, or subcontractor shall be liable for compensation to any employee injured while in the employ of any of his subcontractors engaged upon the subject matter of the contract to the same extent as the immediate employer.        

There are nuances to the statute, including the contractual obligation of the parties and a requirement that the injury occur in certain proximity to the principal contractor, that Georgia case law has expanded and contracted over the years. However, the underlying goal the statute seeks to facilitate is for the principal contractors, or any other subcontractor up the chain from the immediate employer, to retain coverage in order to increases the chances that an injured worker will have recourse under the Workers’ Compensation Act, even if not from his own direct employer.

For the contractors up the chain from the immediate employer, there is certainly some benefit to carrying coverage. Sure, there is the cost of the coverage, but in exchange, the contractors are offered tort immunity. However, for their workers’ compensation carriers, it means potentially paying out on a claim for an injured worker that its insured did not hire.  Arguably, this could be somewhat expected in a scenario where the direct employer/subcontractor has less than three employees, and therefore, has no obligation to under the Act to carry coverage. But frustration sets in when the direct employer/subcontractor holds himself out as having coverage, yet no policy is actually in place on the date of injury, leaving the “innocent” statutory employer with a pile of medical bills, or worse.

In workers’ compensation claims, reality is typically stranger than fiction. In two very recent scenarios, an insured and its carrier were faced with liability as the statutory employer despite the fact that a seemingly valid certificate of insurance was presented by the direct employer to the insured contractor prior to the commencement of work. In the first scenario, the direct employer/subcontractor seemingly went through the process of obtaining coverage with an insurance agent and presented the contractor/insured with a certificate of insurance. Work commenced and it was not until after the employee was injured and the direct employer attempted to make a claim with his carrier, that it was discovered that the certificate of insurance was invalid because the insurance agent never actually procured the policy. Unbeknownst to the direct employer, the agent had falsified records and provided the direct employer with a fraudulent and invalid certificate, representing to the direct employer, and ultimately the insured contractor, that the direct employer was covered. As a result of the agent’s insurance fraud, to which he ultimately pled guilty, the direct employer lacked coverage and the insured contractor was deemed the statutory employer. Fortunately for the claimant, there was coverage in place above his direct employer. Unfortunately for statutory employer’s carrier, they had to unexpectedly pay the claim.

            In the second scenario, a direct employer obtained a valid insurance policy, but due to its failure to comply with an auditing request, the policy was cancelled. The direct employer, somewhat naively, believed that it had sufficiently complied by producing the requested paperwork in order to keep its policy in effect.  The policy was ultimately reinstated, but during the course of the short lapse in coverage, an injury to the direct employer’s employee occurred. Consequently, as a result of the lapse, the direct employer was without coverage on the date of injury, rendering its contractor liable as the statutory employer.

            In these two scenarios, and certainly many others, the statutory employer and its carrier are liable despite requiring that the direct employer carry its own coverage in order to prevent this exact scenario. Unfortunately for the statutory employer/insurer, absent some other defense regarding compensability of the claim, they will be stuck with liability for a claim if the direct employer has no coverage.  Without a cooperative direct employer, it also means that the statutory employer/insurer must defend the claim of someone else’s employee. In so many instances, these cases involve subcontractors who rarely document wage records, hours worked or other pertinent personnel information, leaving a sparse paper trail from which the statutory employer/carrier can build a defense.

Not all hope is lost. While the statute places liability on an otherwise “innocent” employer/insurer, it also provides some recourse for the statutory employer/insurer to seek reimbursement from the direct employer for the money it pays out on the claim. O.C.G.A. § 34-9-8 provides in part,

(b)        Any principal, intermediate, or subcontractor who shall pay compensation under subsection (a) of this Code section may recover the amount paid from any person who, independently of this Code section, would have been liable to pay compensation to the injured employee or from any intermediate contractor.

(c)        Every claim for compensation under this Code section shall be in the first instance presented to and instituted against the immediate employer, but such proceedings shall not constitute a waiver of the employee's right to recover compensation under this chapter from the principal or intermediate contractor. If such immediate employer is not subject to this chapter by reason of having less than the required number of employees as prescribed in subsection (a) of Code Section 34-9-2 and Code Section 34-9-124 does not apply, then such claim may be directly presented to and instituted against the intermediate or principal contractor. However, the collection of full compensation from one employer shall bar recovery by the employee against any others, and the employee shall not collect a total compensation in excess of the amount for which any of the contractors is liable.

To seek reimbursement under this statute, the statutory employer/insurer must first determine what, if any, assets the direct employer. This may include deposing the direct employer and seeking documentation to substantiate its financial condition for purposes of determining whether there might be able money available for recoupment.

In practice, once that determination is made, the most ideal way for the statutory employer/insurer to proceed would be to secure a written judgment deeming it liable as the statutory employer/insurer by virtue of the direct employer’s failure to secure coverage. This can be done via Consent Order should the direct employer be located and willing to participate and sign the Order, or otherwise by means of a Hearing Award where compensability of the injury itself is not contested. In that instance, the statutory employer simply needs to put up evidence regarding the employment relationship and the direct employer’s lack of coverage. Once the underlying liability of the immediate employer and the subsequent liability of the statutory employer is established by an Order or Award, the statutory employer/insurer must then file a Petition for Entry of Final Judgment with the Superior Court of the county where the underlying injury occurred, obtain a fi fa and proceed in an action against the direct employer in an attempt to collect the funds paid out on the claim through the direct employer’s bank accounts or other assets of the company.

The statute provides for an absolute right of the statutory employer who pays compensation under the Code section to recover the amount paid from the immediate employer. Unfortunately, in practice, seeking this reimbursement is timely and expensive, and could require a significant amount of discovery. Ultimately, it may also be futile and not make sense financially. A judgment is only as good as the paper it’s written on if the direct employer does not pay and the statutory employer/insurer cannot collect on it. Therefore, at least completing enough to discovery to get an idea of the extent of any assets the direct employer has, and the likelihood of the direct employer filing Bankruptcy, would be prudent for determining the cost/benefit of actually attempting to seek recovery under the statute. Another option for mitigating the litigation expense and the risk associated with a futile attempt to obtain recoupment of benefits would be to simply see whether the direct employer would contribute towards settlement. Reaching settlement between all parties with contribution from the direct employer would not obviate the fact that the statutory employer’s carrier will be paying out something on the claim, but if it means securing at least some contribution from the direct employer, then it may be worth it to not have to try to collect on a judgment down the road. 

The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved. 

Editorial Board:

H. Michael Bagley