In 2005, Hurricanes Katrina and Rita caused unprecedented destruction in south Louisiana. As a result of both storms, construction work has increased dramatically in both southwestern and southeastern Louisiana. Much of this work involves general contractors and subcontractors. What happens if an employee of a subcontractor is injured on one of these construction jobs? From whom can the employee obtain workers' compensation benefits? What should a general contractor do to protect itself when faced with workers' compensation claims filed by employees of subcontractors?

General contractors need to know their potential liability when entering into subcontracts. Likewise, insurance companies that insure general contractors need to properly assess the exposure for employees of subcontractors. This issue is specifically addressed in La. R.S. 23:1061. This statute has been subject to judicial interpretation a number of times, and court decisions have been difficult to reconcile. In most cases involving the general contractor/subcontractor construction relationship, the injured workers' attempts to sue the general contractor in tort (a civil suit for damages over the alleged negligent actions of another), and the general contractor responds by arguing that the injured worker's sole remedy is workers' compensation since it is the injured worker's "statutory employer." However, other cases arise where the injured employee seeks workers' compensation benefits from the general contractor because the subcontractor did not have insurance. If the general contractor is in fact the "statutory employer" of the injured worker, it is responsible for providing workers? compensation benefits to the injured worker.

In looking at the issue of workers' compensation benefits for the injured employee of the subcontractor, the employee can first seek benefits from his direct employer, the subcontractor. If the subcontractor has its own workers' compensation insurance, which it is mandated to have by law, the insurer of the subcontractor will be responsible for the benefits. If the subcontractor does not have insurance or denies that the claim is compensable so that benefits are not paid, demand may be made upon the general contractor to provide workers' compensation benefits. The question to be addressed at that point is whether the general contractor is the "statutory employer" of the injured worker.

What Constitutes Statutory Employment?

The general idea behind statutory employment is that when a business undertakes work that is part of its trade, business, or occupation, and contracts with another business to execute either all or part of that work, then the first business is considered to be the statutory employer of the employees of the second business. However, the statutory employer rule is limited to two specific situations explained and illustrated below.

The first, and the one most common in the construction industry, is called the "two-contract" theory and applies when the general contractor (referred to in La. R.S. 23:1061 as the "principal"), is in the "middle of two contracts." This is best illustrated by the following example. Suppose Abel Construction Company contracts with a homeowner to build a second story on the homeowner's house. Abel Construction enters into a contract with the homeowner to do the construction work. Abel in turn contracts with Baker Plumbing Company to handle the upstairs plumbing. In this situation, Abel 1) is the general contractor; 2) is engaged in work that is part of its trade, business, or occupation; 3) has entered into a contract with the homeowner to perform the work; and 4) has contracted with Baker, a subcontractor hired to do some of the work. Thus, Abel Construction is in the middle of two contracts, one with the homeowner and one with the subcontractor, and therefore is responsible for providing workers' compensation benefits to any employee of Baker injured on the job.

The second situation in which a principal can be considered the statutory employer is when the principal enters into a "written contract" with another party that recognizes the principal as the statutory employer. In this case, the principal does not have to be in between two contracts to be responsible for workers' compensation benefits for employees of the other company. Another construction example illustrates this situation. Abel Construction Company buys, renovates, and then sells commercial property. It needs to make repairs to the roof of one of the buildings it plans on selling. Abel hires a roofing company to make the repairs. The only contract that has been made in this example is between Abel Construction and the roofer, so the "two-contract" theory does not come into play. However, if part of the agreement with the roofer specifies in writing that it will be the statutory employer of the roofer's employees, then Abel Construction can be responsible for providing workers' compensation benefits for those employees potentially injured while working on its roof.

The statute also provides that when a written contract specifies a statutory employer relationship, there is a rebuttable presumption of an employment relationship between the principal and the contractor's employees. Only by showing that the work is not an "integral part of or essential to the ability of the principal to generate his goods, products, or services" can the presumption be overcome. This provision typically arises in the tort arena where the injured employee sues the general contractor in tort and the general contractor asserts as an affirmative defense that it is the statutory employer and is immune from being sued in tort. The written agreement creates the presumption of a statutory employer relationship, but the injured employee can rebut the presumption by proving the work of the subcontractor was not "an integral part of or essential to the ability of the general contractor to generate its goods, products, or services."

The general contractor that becomes responsible for the workers' compensation benefits of an injured employee of a subcontractor does have the right to seek indemnity against the subcontractor for any benefits that it may have to pay, as provided for in La. R.S. 23:1063. The actual value of that right is dependent upon the financial solvency of the subcontractor.

How Can a General Contractor Protect Itself?

In order to protect itself against claims for workers' compensation benefits by employees of a subcontractor, the general contractor must first understand its exposure. In most cases, the general contractor will find itself in the middle of two contracts, so it will be considered to be the statutory employer of the subcontractor's employees. If the subcontractor does not have insurance, a claim against the general contractor's policy may be made. This will be reported to the general contractor's insurer and, if owed, will affect the insurance policy's experience modifier just as a claim would of an employee of the general contractor. Another potential exposure that a general contractor may face, if the subcontractor does not have workers' compensation insurance, is found at R.S. 23:1171.2. This statute penalizes an employer that fails to carry workers' compensation by increasing the amount of benefits owed to an injured employee by 50 percent. In Isaac v. Lathan, 836 So. 2d 191 (La. App. 1st Cir. 11/8/02), the court held that the insured principal is solitarily liable with the subcontractor for the 50 percent increase because the subcontractor did not have workers' compensation insurance at the time of the employee's injury.

A general contractor can protect itself by requiring the subcontractor provide proof of workers' compensation insurance before entering into a contract and allowing them to begin work. This is usually remedied by requiring that the subcontractor provide a valid certificate of insurance. Additionally, the general contractor should also verify with the subcontractor's insurance agent that the policy is still in effect and that there are no exclusions not apparent on the certificate of insurance. A common issue that arises is when an officer of a corporation or a sole proprietor elects to exclude himself or herself under its company's insurance policy but does not inform the general contractor of the exclusion.

Conclusion

By understanding the potential exposure for workers' compensation benefits for employees of subcontractors, and by ensuring that subcontractors provide proof of existing workers' compensation insurance, a general contractor can help reduce unintended exposure to workers' compensation claims of employees of subcontractors by ensuring that the risk properly rests with the subcontractor.