Brian Dunstone, Weber Gallagher Simpson Stapleton Fires & Newby

Have you heard this one before? This is a story involving Company A (general contractor), Company B (subcontractor 1), Company C (subcontractor 2) and an injured worker. Company A enters into an agreement with Company B for Company B to do some work on a construction project. Company B enters into a separate agreement with Company C to perform some portion of that construction project. During the performance of Company C’s portion of the construction project, one of Company C’s employees, the claimant, gets injured on the job. Who do you think would have exposure for the claimant’s potential workers’ compensation claim? If you said Company C, you would be partially correct. Depending on some key facts, the answer may actually be Companies A, B and C. While Company C is the entity that would traditionally be considered the claimant’s employer and would therefore have exposure for the claimant’s work injury, there are provisions of the Pennsylvania Workers’ Compensation Act under which Company A or Company B could also have exposure for the claimant’s work injury if certain important things are present in the case. Depending on the facts of the particular case, Sections 302(a) and 302(b) of the Pennsylvania Workers’ Compensation Act are two such provisions that could ultimately lead to Company A and Company B being held liable for the claimant’s work injury as the claimant’s statutory employers if they satisfy the requirements of either Section 302(a) or 302(b).

Definition of ‘Statutory Employer’

“A statutory employer is a master who is not a contractual or common law one, but is made one by the Pennsylvania Workers’ Compensation Act.” See Peck v. Delaware County Board of Prison Inspec­tors, 814 A.2d 185 (Pa. 2002). An entity cannot be both a direct employer and a statutory employer, as in American Road Lines v. Workers’ Compensation Appeal Board (Royal), 39 A.3d 603 (Pa.Cmwlth. 2012). Although statutory employers are often found in the context of construction cases, they can also be found in other situations as well.

Statutory Employer Test Under Section 302(a) (77 P.S. 461) 

  • Coverage of employees of subcontractor; subcontractor defined; exception

A contractor who subcontracts all or any part of a contract and his insurer shall be liable for the payment of compensation to the employees of the subcontractor unless the subcontractor primarily liable for the payment of such compensation has secured its payment as provided for in this act. Any contractor or his insurer who shall become liable hereunder for such compensation may recover the amount thereof paid and any necessary expenses from the subcontractor primarily liable therefor. For purposes of this subsection, a person who contracts with another to have work performed consisting of the removal, excavation or drilling of soil, rock or minerals, or the cutting or removal of timber from lands, or to have work performed of a kind which is a regular or recurrent part of the business, occupation, profession or trade of such person shall be deemed a contractor, and such other person a subcontractor. This subsection shall not apply, however, to an owner or lessee of land principally used for agriculture who is not a covered employer under this act and who contracts for the removal of timber from such land.

Unlike analysis under Section 302(b) of the act, the five McDonald factors mentioned below are not applicable to a Section 302(a) analysis, see Six L’s Packing v. Workers’ Compensation Appeal Board (Williamson), 44 A.3d 1148 (Pa. 2012).

There are three essential elements that must be established in order for a contractor to be held liable for the payment of compensation benefits under a statutory employer theory pursuant to Section 302(a). These elements are a contract between a contractor and a subcontractor, the contract between the contractor and subcontractor must involve a regular or recurrent part of the contractor’s business, occupation, profession or trade, and the subcontractor did not secure the payment of workers’ compensation benefits (either by a Pennsylvania workers’ compensation insurance policy or some other state’s workers’ compensation insurance policy that would pay such benefits). If all of these elements are established, then the contractor could be deemed to be a statutory employer of the subcontractor’s employees, and the contractor could be held liable for the payment of workers’ compensation benefits to the subcontractor’s employee for a work-related injury. If the statutory employer is ultimately found to be liable for the payment of workers’ compensation benefits for a subcontractor’s employee’s work injury, the statutory employer would have a statutory right to seek reimbursement from the subcontractor for the workers’ compensation benefits and necessary expenses paid by the statutory employer.

Statutory Employer Test Under Section 302(b) (77 P.S. 462)

  • Coverage of laborer or assistant hired by employer or contractor; contractor defined

Any employer who permits the entry upon premises occupied by him or under his control of a laborer or an assistant hired by an employer or contractor, for the performance upon such premises of a part of such employer’s regular business entrusted to that employer or contractor, shall be liable for the payment of compensation to such laborer or assistant unless such hiring employer or contractor, if primarily liable for the payment of such compensation, has secured the payment thereof as provided for in this act. Any employer or his insurer who shall become liable hereunder for such compensation may recover the amount thereof paid and any necessary expenses from another person if the latter is primarily liable therefor.

For purposes of this subsection (b), the term “contractor” shall have the meaning ascribed in Section 105 of this act.

To find the existence of a statutory employer under Section 302(b), five distinct elements must be confirmed according to McDonald v. Levinson Steel, 153 A. 424 (Pa. 1930). These elements include: contract with owner of land or one in the position of an owner; premises occupied or under the control of the contractor seeking statutory employer status; subcontract made by contractor; part of contractor’s regular business must be entrusted to the subcontractor under the contract; and employee of subcontractor is injured on the premises.

Effect of Being Deemed a Statutory Employer

  • Exclusive remedy provisions of the Pennsylvania Workers’ Compensation Act

Generally speaking, an employee’s exclusive remedy against his employer is under the Pennsylvania Workers’ Compensation Act for work-related injuries. As you might suspect, there are a number of exceptions to an employer’s immunity from suit by an employee. For a discussion about the various exceptions to the exclusive remedy provisions of the act, please contact an experienced workers’ compensation attorney.

An employer’s immunity, provided by the exclusive remedy portions of the act, is afforded to statutory employers by virtue of their statutory-employer status alone, such that it is accorded even where the statutory employer has not been required to make any actual payments of workers’ compensation benefits, see Fonner v. Shandon, 555 Pa. 370, 380, 724 A.2d 903, 907 (1999).

Depending on the facts of a particular case, a contractor may want to be considered to be a statutory employer under the act in order to reap the benefits of the exclusive remedy provisions of the act. However, in exchange for the benefits that could be obtained via the exclusive remedy provisions of the act, a contractor deemed to be a statutory employer could also be potentially liable for wage loss, specific loss and medical benefits in the same way that a traditional employer would be under the act.

  • Statutory Employer’s liability for workers’ compensation benefits of a subcontractor’s employee

If deemed to be a statutory employer, a contractor could be held liable for the payment of workers’ compensation benefits for work-related injuries sustained by its subcontractor’s employees in performance of the subcontract under Section 302(a) (77 P.S. 461) or Section 302(b) (77 P.S. 462) of the act. Such liability would be secondary to the subcontractor’s liability under the act. In the situation where the subcontractor maintains Pennsylvania workers’ compensation insurance, the contractor/statutory employer may never actually have to pay any workers’ compensation benefits to the claimant. However, when the subcontractor does not maintain Pennsylvania workers’ compensation insurance, the contractor/statutory employer would become liable for the payment of such benefits once the claimant’s entitlement to such benefits under the act has been established. The UEGF would be secondarily liable to all other employers/statutory employers.

In those situations where a subcontractor fails to maintain Pennsylvania workers’ compensation insurance and the contractor/statutory employer becomes liable for the payment of the claimant’s workers’ compensation benefits under the act, the Claimant would typically file a claim petition seeking workers’ compensation benefits against his traditional employer (the subcontractor). The claimant would eventually learn that the subcontractor did not have Pennsylvania workers’ compensation insurance, and the claimant would proceed to file a claim petition against the uninsured employer (subcontractor) and the uninsured employer guaranty fund (UEGF). Next, either the claimant or the UEGF would file joinder petitions seeking to join suspected statutory employers in the litigation. After the various entities/parties have been joined in the litigation, the litigation of the claimant’s claim petition would proceed in the typical fashion where claimant would present his or her evidence in support of the claim for benefits, and the defendants would present their evidence in opposition.

It would not be uncommon for defendants who were joined as suspected statutory employers to seek dismissal from the case on the grounds that they would not qualify as the claimant’s statutory employer. Such motions and requests would typically be addressed early on in the litigation, but not always.

Conclusion

There are a number of things to consider when determining whether a contractor would be considered a statutory employer under the act. It is important to remember that a contractor could qualify as a statutory employer under the act but never have to pay workers’ compensation benefits to an injured claimant as long as the subcontractors involved maintained Pennsylvania workers’ compensation insurance. Every person or entity who subcontracts work in their regular or recurrent business should ensure that their subcontractors maintain sufficient Pennsylvania workers’ compensation coverage in order to shield themselves from liability for the subcontractor’s employee’s work-related injuries. A subcontractor’s workers’ compensation insurance in another state is not necessarily sufficient to shield a contractor from liability under a statutory employer theory. The simplest way for Company A and Company B to avoid potentially significant liability as a statutory employer is to ensure that Company C obtains and maintains Pennsylvania workers’ compensation insurance. As long as Company C maintains adequate Pennsylvania workers’ compensation coverage, Companies A and B would be unlikely to even be involved in the claimant’s potential workers’ compensation claim, since statutory employers are generally only brought into the case when a claimant’s direct/traditional employer either does not have workers’ compensation insurance, or has inadequate insurance (such as workers’ compensation insurance in another state that would not cover the full exposure in the Pennsylvania workers’ compensation case).

Brian Dunstone, an associate with Weber Gallagher Simpson Stapleton Fires & Newby, concentrates his practice on defending employers and insurance companies in workers’ compensation matters. Contact him at bdunstone@wglaw.com.