ISSUE: Section 4 – Insurance requirement, statutory employer, and a no-fault remedy

Jack_crop 72dpiWe all have our favorite sections of the Longshore Act.  There are the cryptic “status” and “situs” provisions of sections 2(3) and 3(a).  There are the sweeping medical care provisions of section 7; the complex average weekly wage provisions of section 10 and attorney fee provisions of section 28; the scary criminal and liability provisions of sections 5 and 38.  The section 8 grab bag of compensation provisions from scheduled awards to second injury fund relief to lump sum settlements has its proponents as the most important section.  Claims people struggle with the presumptions provided in section 20.  Don’t forget the ticking clocks in sections 12 and 13.  And so forth.

But don’t overlook section 4 (33 U.S.C. 904).  It’s relatively short, but it has important things to say.

“Section 4(a) Every employer shall be liable for and shall secure the payment to his employees of the compensation payable under sections 7, 8, and 9 (33 U.S.C. Sections 907, 908, 909).  In the case of an employer who is a subcontractor, only if such subcontractor fails to secure the payment of compensation shall the contractor be liable for and be required to secure the payment of compensation.  A subcontractor shall not be deemed to have failed to secure the payment of compensation if the contractor has provided insurance for such compensation for the benefit of the subcontractor.

(b) Compensation shall be payable irrespective of fault as a cause for the injury.”

Important points:

First, there is the “insurance requirement”.  Every employer shall secure the payment of compensation.
Second, if the employer is a subcontractor, only if such subcontractor fails to secure the payment of compensation shall the contractor be liable.
Third, a subcontractor has not necessarily failed to secure compensation if the contractor has provided insurance.
Fourth, Fault is irrelevant under the Longshore Act.

There are some tricky issues.

How do you “secure” the payment of compensation?
What is a “contractor”?
What is a “subcontractor”?
What does “failed” to secure compensation mean?”

In the course of discussing these issues, we’ll get indirectly involved with what is the common law doctrine of “borrowed employee”.

Section 32 answers the question about securing the payment of compensation.  You have two choices.  You buy insurance from an insurance carrier authorized by the U.S. Department of Labor (DOL) to write coverage under the Act, or you obtain authorization from the DOL to self-insure.

Section 4 states that every employer “shall” secure the payment of compensation.  Sections 5 and 38 provide the consequences to the employer who doesn’t properly secure payment.  Hint – it involves an election of remedies for the employee and joint and several civil and criminal liability for corporate officers.

Next, let’s consider what happens if the “subcontractor” “fails” to secure the payment of compensation.

If the subcontractor fails to secure payment then the “contractor” shall be “liable for and be required to secure the payment of compensation”.

The 1984 amendments to the Longshore Act changed the language of section 4 to require the failure of the subcontractor to secure payment in the first instance in order to shift statutory liability to the contractor.

This language deliberately overruled Supreme Court precedent in the case of Washington Metropolitan Area Transit Authority v. Johnson, 467 U.S. 925 (1984).  Under the pre-amendment version of section 4(a), a contractor could pre-empt the subcontractor’s insurance requirement by providing “wrap-up” insurance for the employees of subcontractors.  One result of this would be that the contractor would assume the employer’s immunity to tort suits by the subcontractor’s employees under the exclusivity provision of section 5(a), since it was the statutory employer.

So the 1984 amendment denies tort immunity to a contractor except in circumstances where it is forced into the role of statutory employer by the failure of the subcontractor to secure compensation.

Now we get to a difficult issue under section 4.  In this context, what is a contractor, and what is a subcontractor, such that the relationship gives rise to section 4(a) statutory employer liability?

Of course, Congress did not define the terms “contractor” and “subcontractor”, so they have been open to interpretation.

Section 4(a) premises liability on a finding that the contractor is subject to some contractual obligation to a principal which it in turn passes on in whole or in part to a subcontractor.

In a typical formulation, a contractor will be held secondarily (statutorily) liable for workers’ compensation when the injured employee was engaged in work either that is a subcontracted fraction of a larger project or that is normally conducted by the contractor’s own employees rather than by a subcontractor, or as it is sometimes unfortunately phrased, an independent contractor.

Another approach to identifying a contractor-subcontractor relationship is the “two contract” requirement.  This is where there is an employer, or contractor, passing along part of its own contractual obligation to subcontractors.  In other words, the general contractor is one who has a contractual obligation of its own, a portion of which he subcontracts to another.

Example:  A shipyard contracts for the renovation of one of its sheds.  The shipyard is the owner of the shed, not under a contractual obligation to renovate the shed.  Also, the shipyard is not in the business of renovating buildings and its employees do not usually do that type of work.  The shipyard merely contracted out the job to an “independent contractor”.  The shipyard has no liability under section 4(a) if the “independent contractor” has failed to secure compensation.

The Longshore Act in section 4 distinguishes between employers who are owners or principals and those who are general contractors working under contractual obligations to others.

So, for the statutory employer provision of section 4(a) to apply there must be a principal, a contractor, and a subcontractor relationship with a “two contract” context.

Section 4(b) is clear.  Compensation shall be payable irrespective of fault as a cause for the injury.  This is due to the nature of the concept of workers’ compensation as a compromise.  Remember, before the workers’ compensation laws were passed beginning in 1910, if a worker were injured on the job he had to sue his employer in tort based on negligence.  The employer had several effective common law defenses to such lawsuits, such as negligence of a fellow employee, assumption of risk, and contributory negligence.

Under the approach embodied in the Longshore Act and other workers’ compensation laws, the employer relinquishes his defenses in exchange for limited and predictable liability, and the employee accepts the limited statutory recovery because he receives prompt payment without the uncertainties and delays inherent in going to court.

The issue of fault is irrelevant in Longshore Act cases.  The sole exception is the defense provided in section 3(c) if the injury is due solely to the employee’s intoxication or the employee’s willful intent to injure himself or another.

This discussion has run on too long.  We’ll wait for next time to discuss how, if at all, the doctrine of “borrowed employee” fits in with the statutory employer provision of section 4.

John A. (Jack) Martone served for 27 years in the U.S. Department of Labor, Office of Workers Compensation Programs, as the Chief, Branch of Insurance and Financial Management, and the Acting Director, Division of Longshore and Harbor Workers’ Compensation.  Jack joined The American Equity Underwriters, Inc. (AEU) in 2006, where he serves as Senior Vice President, AEU Advisory Services and is the moderator of the AEU Longshore Blog.

ISSUE: Independent Contractors

I think that the expression “independent contractor” is used too often in different contexts to mean different things.  This results in confusion regarding the term.  I would like to contribute to the confusion with a few short comments.

First, some general principles: 

1)      The Longshore Act imposes an insurance requirement on “employers” for the benefit of “employees”“Self employed” individuals are not employees.

2)      Depending on the circumstances, “subcontractor” is not the equivalent of “independent contractor”.

3)      A so called “sole proprietor” may be a self employed individual, a subcontractor, or an independent contractor.

4)      There are no exclusions in the Longshore Act for corporate officers, sole proprietors, business owners (if they are also employees), or small businesses.

5)      The terms “independent contractor”, “subcontractor”, “sole proprietor”, and “self-employed” should not be used interchangeably. 

Now for the different contexts in which the term “independent contractor” is used.  There is the term “independent contractor” that may mean a self-employed individual rather than an employee.  Then there is the term “independent contractor” that may be and should be used in contradistinction to the term “subcontractor”.  Then there is the term “independent contractor” that may be used in the sense of sole proprietor.  These different usages all have relevance to issues such as statutory employer under section 904(a), section 905(a) exclusivity, and whether or not there is even an employer-employee relationship for liability and insurance purposes.

Section 904(a) – “Every employer shall be liable for and shall secure the payment to his employees of the compensation payable under sections 7, 8, and 9.  In the case of an employer who is a subcontractor, only if such subcontractor fails to secure the payment of compensation shall the contractor be liable for and be required to secure the payment of compensation …. “

In order for the contractor to become the “statutory employer” of the subcontractor’s employees under section 904(a), you need a contractor – subcontractor relationship.  That is, there are two contracts involved; the contractor’s obligation to the business owner in one direction, and in the other direction, the contractor passing on part of the obligation to one or more subcontractors.  If there is only one contract, between the owner and the contractor, in this sense the contractor is an “independent contractor”.  This relationship does not create the “statutory employer” obligation for the owner imposed by section 904(a).  This is one usage of the term independent contractor.  Basically, it means not a subcontractor, and no “statutory employer” obligation arises if the independent contractor is uninsured.

Section 904(a) – “Every employer shall be liable for and shall secure the payment (of compensation) to his employees ….”  In other words, there must be an employer – employee relationship for the insurance requirement to attach.  A self-employed individual is not an employee.  I’ve seen the term “independent contractor” used to denote a self-employed individual, hired for his special expertise, usually for less than the duration of the complete project, who performs work not usually performed by employees of the contractor, and who controls his own piece of the operation.  In this usage, the self-employed individual, or independent contractor if you insist, is not an employee and is not covered by workers’ compensation insurance.

Sole Proprietor – This one is tricky.  The sole proprietor is the owner of a business, and if it is incorporated he may be the owner of the business and also its only employee.  Technically, he meets the definition of “employee” of the incorporated entity, especially when he is performing typical “employee” duties.  This situation provides still another usage of the term “independent contractor”.  It gets a bit surreal when you begin to consider the employer – employee relationship in this context, and what the implications might be for a general contractor under section 904(a) if the subcontractor in the role of sole proprietor fails to secure the payment of compensation to the business’ only employee, himself.

Here’s my suggestion.  Limit the use of the term “independent contractor”.  It should only be used in the context of section 904(a) to denote the direct relationship to the business owner that does not create the statutory employer situation.  This usage will make clear that you are not referring to a subcontractor.

“Independent contractor” should not be used interchangeably with either “self-employed” contractor or “sole proprietor”.

Of course, my suggestion doesn’t help much if the facts are such that you are not sure whether you have an independent contractor, one contract type of situation, or if your self-employed contractor is, in fact, self-employed.  But I think that we’ll still be better off if we agree to use the term “independent contractor” only in the context of section 904(a) to mean not a subcontractor.