April 19, 2022 Increased Liability for Subcontractor’s Injured Workers

Changes in the legal landscape could result in manufacturers’ increased tort liability for workplace accidents involving subcontractors.

The Statutory Employee Doctrine

The core objective underpinning workers’ compensation laws is to provide compensation for employees who are injured on the job. State workers’ compensation systems replaced the common law tort system.  As a result, workers’ compensation benefits are the exclusive remedy for work-related injuries. 

Through this no-fault system, employers are held strictly liable for providing benefits to injured workers. In return, injured workers waive their right to seek redress for their injuries through the tort system. For employees, the system is beneficial because it provides swift and sure compensation. For employers, the exclusivity of workers’ compensation benefits provides a measure of certainty with respect to damages. This “quid pro quo approach” is advantageous for employees and employers alike.

Most states have laws extending workers’ compensation coverage requirements to principal or statutory employers. This means that if a company contracts out part of its business to subcontractors, the upstream company must still provide coverage to the actual workers. The primary goal of the “statutory employee doctrine” is to ensure greater coverage and provide an added layer of security if the subcontractor fails to satisfy its coverage obligations.

In some states, statutory employers are entitled to tort immunity regardless of whether they are required to make actual payment of benefits. In other states, immunity only applies if the upstream employer becomes liable for workers’ compensation benefits. In a handful of states, workers’ compensation exclusivity does not apply to upstream employers, meaning they are not afforded immunity from tort actions.

There has been a recent movement towards maximizing recovery for injured workers by scaling back workers’ compensation exclusivity for upstream employers. A clear illustration of the changing landscape can be found in a recent decision from the highest court in South Carolina, which could have a destabilizing impact on the manufacturing sector.

A Case Study: Keene v. CNA Holdings, LLC

Keene v. CNA Holdings, LLC contains a familiar set of facts. A manufacturing company subcontracted with another company to provide maintenance and repair work at its plant.  The subcontractor in turn hired the plaintiff, who was exposed to asbestos while working at the plant. The plaintiff developed mesothelioma, which ultimately led to his death. 

When the plaintiff’s estate filed a lawsuit alleging that the manufacturer negligently exposed him to asbestos, the company asserted that the plaintiff was its “statutory employee.”  Thus, pursuant to the exclusivity doctrine, his tort claims were barred.    

The South Carolina Supreme Court disagreed, and concluded that the plaintiff could pursue tort liability against the upstream manufacturer. The court couched its decision as an application of the doctrine to the “modern economy,” shifting the focus of its analysis to address what the upstream business owner decides is part of its business.  In other words, when a business outsources work because it believes its own workforce is not equipped to handle the task, it has defined the scope of the company’s business to not include that particular type of work and, as a result, the upstream business no longer enjoys the protections of workers’ compensation exclusivity.

In this decision, the South Carolina Supreme Court sharply diverged from well-established precedent and appeared to focus on maximizing the plaintiff’s recovery at the expense of providing protection for all injured workers by ensuring a uniform right to benefits. Given the significant impact of this decision, and the apparent departure from established precedent, manufacturers may wish to strongly consider seeking a resolution from the legislature.

Impacts on the Manufacturing Industry         

As manufacturers evaluate where to establish new facilities, it is more important than ever to assess state laws regarding the applicability of workers’ compensation exclusivity to upstream business owners. Changes in this area will certainly have an influence on economic development due to the cost a state’s workers’ compensation system has upon the state’s ability to attract and retain businesses.

Manufacturers also should consider revisiting their current business practices in light of recent developments. For instance, most subcontracts require the subcontractor to maintain adequate workers’ compensation coverage, with the upstream employer covering the costs of these insurance premiums for their statutory employees. The historical framework is, in effect, baked into contractual relationships with subcontractors. Likewise, manufacturers have made their purchasing decisions for general liability insurance in reliance on the strength of the established framework (i.e., by assuming they have acquired a measure of protection from civil liability with regard to contracted labor). Thus, manufacturers might take steps to reassess their amount of liability protection to ensure it is sufficient to cover civil negligence actions from injured workers.

In the end, if workers are progressively allowed greater leeway to pursue tort liability against upstream manufacturers, it is crucial that companies consider potential liability when making outsourcing decisions, as the statutory employee doctrine and accompanying civil liability immunity may no longer apply.  

William H. Foster and Katie E. Towery are attorneys in Littler’s Greenville, South Carolina office. They advise and defend employers on a local, regional and national basis regarding a variety of employment-related matters, including discrimination and retaliation claims, non-compete and trade secret litigation, and corporate investigations and risk management. Bill and Katie represented the National Association of Manufacturers in drafting an amicus brief in support of rehearing in Keene v. CNA Holdings.  They can be reached at bfoster@littler.comand ktowery@littler.com.

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