In March, the Superior Court of Pennsylvania issued a decision in Patton v. Worthington Associates that virtually eliminated the statutory employer defense in Pennsylvania and, should the decision stand, will create a flood of new litigation against contractors and their insureds and will serve to substantially elevate construction costs throughout Pennsylvania.

What does this mean for the construction industry? The short answer is greater exposure to claims made by employees of subcontractors.

In Patton, 43 A.3d 479 (Pa. Super. Ct. Mar. 27, 2012), the Superior Court concluded that the statutory employer defense is available only to contractors that maintain a common law master-servant relationship with the employees of the subcontractor by demonstrating that the contractor had the contractual right to control the means and methods of the subcontractor’s injured employee.

Before one can fully appreciate the adverse impact this holding will generate for the construction industry, a historical analysis of the statutory employer concept in the commonwealth of Pennsylvania is appropriate.

The classic setting for the statutory employer concept is found in the construction industry, where the general contractor typically employs contractors, which, in turn, employs subcontractors to work at a job site. Since it was first included in Pennsylvania’s original workers’ compensation statute in 1915, the statutory employer concept has worked to provide workers’ compensation benefits to workers whose direct employers have failed to provide workers’ compensation coverage and has worked to insulate entities other than the subcontractor that could be called upon to provide such benefits from civil liability.

It should be noted that, historically, an employer’s election to provide workers’ compensation insurance was optional. If an employer opted in, it enjoyed civil liability immunity. On the other hand, if an employer opted out, an injured employee could bring a civil action for injuries sustained that were alleged to have occurred as a result of the acts or omissions of the employer.

The statutory employer concept grew from this scenario, so that an employee of a subcontractor, which did not have workers’ compensation insurance, could still recover benefits from the entity that had contracted with the injured employee’s direct employer.

The concept of statutory employer gave any party, which ultimately could be called upon to pay workers’ compensation benefits to the employee of another, immunity from civil liability. That immunity existed even if the contractor was never called upon to pay benefits to the injured employee of the subcontractor.

Until the Superior Court’s decision in Patton, the courts did not concern themselves with the closeness of the relationship between the contractor on the one hand and the worker of a subcontractor on the other.

Amendments to the Workers’ Compensation Act ultimately obligated all employers in the commonwealth of Pennsylvania to carry workers’ compensation insurance coverage absent an employer’s formal designation as self-insured by the Pennsylvania Insurance Department. Once workers’ compensation coverage was mandated, instances where the employee of a subcontractor would have to look to a contractor other than his own direct employer for workers’ compensation benefits were substantially diminished. As a result of these amendments, there were numerous attempts made by the plaintiffs bar to modify the impact of the statutory employer defense. The plaintiffs bar contended that a contractor, who had not been called upon to pay workers’ compensation benefits to an injured employee of its subcontractor because the subcontractor provided coverage, should not be entitled to avail itself of immunity. Our appellate courts, however, have repeatedly rebuffed those attempts, contending that the courts are not empowered to modify or eliminate the statute, and that such remedy was left to the Pennsylvania legislature.

The seminal case setting forth the elements one must satisfy to qualify as a statutory employer is McDonald v. Levinson Steel, 153 A. 424 (Pa. 1930). The McDonald test provides that:

“To create the relation of statutory employer … all of the following elements essential to a statutory employer’s liability must be present: (1) An employer who is under contract with an owner or one in the position of an owner. (2) Premises occupied by or under the control of such employer. (3) A subcontract made by such employer. (4) Part of the employer’s regular business entrusted to such subcontractor. (5) An employee of such subcontractor.”

Asserting that it was not creating a new element under the McDonald test, the Superior Court referenced a need for a master-servant relationship to exist between the contractor and the employee of the subcontractor in order for the contractor to have the benefit of immunity provided under the statutory employer defense. In support of its holding in Patton, the Superior Court rests the alleged requirement of a master-servant relationship on a prior Pennsylvania Supreme Court holding in Joseph v. United Workers Association, 23 A.2d 470, 472 (1942). Curiously, the Supreme Court in Joseph did not address the McDonald test, the determination of statutory employer status, or the proper interpretation of a master-servant relationship under the Workers’ Compensation Act.

The Superior Court appears to have failed to specifically address the Supreme Court’s holding in McDonald. Therein, the Supreme Court took note that the statutory employer determination is in no way determined by whether a master-servant relationship exists at common law. Indeed, the court found that: “A statutory employer is a master who is not a contractual or common-law one, but is made one by the act.” The court went on to state that: “The difficulty arises chiefly in determining who the legislature intended should be included within the class of statutory employers, as distinguished from master and servant at common law, which is taken care of elsewhere by the act.”

It seems clear from the Supreme Court’s reasoning in McDonald that there was no interest in imposing upon a contractor the burden of demonstrating that it had a master-servant relationship with the subcontractor’s employee in order to avail itself of immunity.

Importantly, if, as the Superior Court in Patton now seemingly requires, the statutory employer defense is available only when the contractor is controlling the means of performance of the employees of the subcontractor, then the contractor is the actual and direct employer of the subcontractor’s employees. Under such circumstances, there would be no need for a statutory employer concept. On the other hand, if a contractor presents evidence that its contract established that it was engaged in a master-servant relationship with the employee of the subcontractor, the contractor could well be saddled with withholding and benefit obligations to the employee of the subcontractor, as well as legal liability for the actions of the workers retained by the subcontractor.

The Impact on the Cost of Construction

It should come as no surprise that insurers that underwrite liability coverage for contractors price coverage on their expectations as to what expenses and losses an insured will incur secondary to their insured’s operations.

The statutory employer concept has historically tempered insurance costs in our commonwealth. While accidents at job sites are not infrequent, the ability of an injured employee of a subcontractor to successfully pursue an action against another with whom his employer has a contractual relationship is limited because of the historical immunity bestowed by the statute.

It would be difficult to imagine that any contractor would include language in its contract with a subcontractor that would give the contractor sufficient control over the employees of the subcontractor to generate a master-servant relationship that the Superior Court perceives to be necessary to warrant immunity for the contractor and its employees. Thus, should the holding in Patton stand, it creates the likelihood that any accident that occurs on a job site, injuring the employee of a subcontractor, will trigger multiple claims against other contractors present at the site, resulting in defense costs and loss payments that were not previously experienced by insurers in Pennsylvania, thus driving up the future cost of insurance.

Worthington Associates has petitioned the Supreme Court of Pennsylvania for review. A refusal by the court to hear the appeal by Worthington, or an affirmance by our highest court, would significantly alter the construction litigation landscape and the cost of business for the construction industry and its insurers. •

Mark Gordon is a founding partner of Pietragallo Gordon Alfano Bosick & Raspanti and has achieved a national reputation for his expertise in the area of risk management. He can be reached at mg@pietragallo.com.

John R. Brumberg is an associate at the firm and is a member of the firm’s litigation group. He can be reached at jrb@pietragallo.com.