Statutory Employer Law and Workers’ Compensation Coverage: a Primer for Louisiana Construction Contracts
Did you know that a subcontractor’s employees could be treated as the employees of an upstream contractor under Louisiana law? This classification has very important implications when defending workers’ compensation claims and tort claims from employees of subcontractors and obtaining proper insurance coverage. It can come with advantages and disadvantages, and it is important to understand where potential exposure may lie and how to mitigate those exposures in your contracts. The laws of each state are often different on these issues, thus it is often best practice to tailor subcontracts to Louisiana.
1. Louisiana Worker’s Compensation Act
The Louisiana Workers’ Compensation Act (LWCA) provides that an “employee” injured in an accident while in the course and scope of employment is generally limited to the recovery of workers’ compensation benefits as the exclusive remedy against the employer, and may not sue the employer or any “principal”, also known as a “Statutory Employer”, in tort. The advantage for upstream contractors is potentially sidestepping costly tort exposure for workplace injuries regardless of fault. The disadvantage for the upstream contractor would be the potential to pay workers compensation benefits in the (unlikely) event that the subcontractor and/or its insurer do not pay or are unable to pay.
2. Louisiana Statutory Employer Law
An upstream contractor can be found a “principal” and thus afforded the protections and assume the corollary obligations as a “Statutory Employer” under two scenarios:
- Pursuant to La. R.S. 23:1061(A)(2), being a principal in the middle of two contracts – – referred to as the “Two-Contract” rule; or
- Pursuant to La. R.S. 23:1061(A)(3), the existence of a written contract recognizing the principal as the statutory employer.
The Two-Contract rule applies under the following scenario:
- The principal enters into a contract with a third party;
- Pursuant to that contract, work must be performed; and,
- In order for the principal to fulfill its contractual obligation to perform the work, the principal enters into a subcontract for all or part of the work performed.
The contractor’s burden in proving statutory employer status under the Two-Contract rule often requires some discovery and competent evidence under Louisiana’s evidentiary requirements for motions for summary judgment.[1]
Often, the easier way to assert statutory employer status is via La. R.S. 23:1061(A)(3). If the written contract between the contractor and subcontractor explicitly recognizes the former as the statutory employer, then the burden shifts to the employee to establish that the work he was doing was not “integral” or “essential” to the contractor’s work. While the lay terms “integral” and “essential” sound onerous, jurisprudence has interpreted these terms rather broadly, leading one federal court judge to recently comment that the terms have almost been written out of the statute altogether.[2]
3. Do you want to be the Statutory Employer?
A statutory employer is immune to the vast majority of tort claims brought by employees of subcontractors, regardless of fault. Additionally, a statutory employer is unlikely to pay workers’ compensation benefits if they contract with responsible subcontractors who have obtained proper workers’ compensation coverage in Louisiana.
While it is often easier for an employee to bring a workers’ compensation claim because negligence of the employee/plaintiff is not determinative of entitlement to benefits, the exposure is generally capped at indemnity benefits and medical expenses related to the accident. Workers’ compensation claimants cannot collect for their pain and suffering, loss of enjoyment of life, loss of consortium, etc. These categories of damages often drive up tort exposure in Louisiana.
4. Steps a Contractor Can Take to Reduce Exposure and Ensure Coverage
Contract negotiating and drafting is a crucial part of commercial building contracts. It is important for construction industry professionals to know and understand all of a contract’s terms and conditions and how the interact with each other. It is also important to understand what contract terms are not included, and the potential impact of same on insurance coverage and liability. This is true at all phases of a project: before the contract is signed, during contract performance, and after the contract is complete. All too often a construction claim or dispute may be lost before a lawsuit is even filed because of the contract terms.
A clearly articulated statutory employer provision will likely assist in decreasing litigation costs and confusion between the parties in the event of multi-party personal injury litigation. In many cases, and particularly those that meet the “Two-Contract Rule” criteria, we often recommend that upstream contractors consider utilizing La. R.S. 23:1061(A)(3) and explicitly recognize itself as a statutory employer. The shifting burden improves the potential for the contractor to be found the statutory employer and enjoy its benefits. Such may decrease tort exposure, litigation costs, while not impacting workers’ compensation exposure.
We often find that contracts not specifically tailored to Louisiana with these issues in mind do not properly afford contractors all available protections under Louisiana workers’ compensation law. For example, the AIA standard form contracts, including AIA 401-2017 Standard Form of Agreement Between Contractor and Subcontractor, does not contain a stock provision regarding this issue. As outlined above, it will likely benefit both parties to consider these issues at the time of contract formation.
We also recommend all contractors double-check Certificates of Insurance to confirm that all subcontractors have workers’ compensation coverage and check the amounts of coverage. We find that most subcontractors obtain workers’ compensation policies with coverage ranging from $500,000 – $2 million or more depending on the size of the subcontractor, but some smaller trade subcontractors may carry much less. We recommend that you check with your workers’ compensation insurer to confirm that the coverage obtained by each subcontractor is sufficient under your policy and there are no gaps in coverage, which could prove costly in the event of a catastrophic workers’ compensation injury. It may also be important to update your subcontracts to require each subcontractor to obtain the minimum coverage required by your insurer.
Further, it is important to evaluate the impact of any hold harmless, indemnification, subrogation, or other liability clauses in conjunction with workers’ compensation exposure. Such provisions may affect liability and the advantages enjoyed by statutory employers. We also find that standard form subcontracts may have provisions that are incompatible with the corresponding insurance policies and/or with Louisiana law limiting indemnification in construction contracts. Inconsistencies across construction contracts may lead to previously unknown and unintended exposures.
[1] La. C.C.P. Art. 966; Cummins v. R.A.H. Homes, LLC, 2017-905 (La. App. 3 Cir. 5/2/18), writ denied, 2018-0906 (La. 10/8/18), 253 So. 3d 801.
[2] See Dillon v. Int’l Paper Co., No. CV 18-1066, 2018 WL 3970468 (E.D. La. Aug. 20, 2018).
