Insurance Federation of Pennsylvania Gives Major Assist in Supreme Court Victory for Statutory Employers & Their Insurers

On March 26, 2014, the Supreme Court of Pennsylvania announced its unanimous decision in the case of Patton v. Worthington Associates, 625 Pa. 1, 89 A.3d 643 (2014), reversing decisions in the lower courts and forcefully reaffirming the Statutory Employer Doctrine of the Pennsylvania Workers Compensation Act.  In its decision, the Court frequently and favorably cited the amicus brief prepared by Tom Tyler of Davis Parry & Tyler, counsel for amici Insurance Federation of Pennsylvania, Inc., and Shoemaker Construction Company.

According to the Workers Compensation Act of Pennsylvania, at 77 P.S. § 52, the Statutory Employer Doctrine fixes responsibility to provide workers compensation benefits to injured workers.  The statute provides that responsibility is imposed not only on the injured worker’s immediate employer, but also, in case that employer defaults, on any superior contractor up the vertical contractual ladder that contracted with that employer.  In return for the imposition of such workers compensation liability (even if a superior contractor has not been called upon to actually pay such benefits), these “statutory employers” are immune from tort liability to the injured worker.  77 P.S. § 481.  According to the seminal 1930 Supreme Court decision of McDonald v. Levinson Steel Co., 302 Pa. 287, 153 A. 424, the following 5 elements must be shown for a general contractor to be deemed a “statutory employer”:  (1) the general contractor is under contract with an owner or one in the position of an owner; (2) the construction site premises are occupied by or under the control of the general contractor; (3) there is a subcontract made by such general contractor with a subcontractor on the job; (4) the work entrusted by the general contractor to the subcontractor is required of the general contractor under the contract with the owner; and (5) the injured worker is an employee of such subcontractor.  In 2012, the Superior Court’s ruling in the Patton case effectively eviscerated the Statutory Employer Doctrine, with predictable adverse consequences for general contractors and their insurance carriers.

In 2013, Tom Tyler published an article at his firm’s website, critical of the lower courts’ decisions in Patton.  Appellant counsel in Patton invited Tom to use the article as the basis for an amicus brief in the appeal to the Supreme Court, which Tom then wrote on behalf of client Shoemaker Construction Company.  After reading Tom’s draft brief, the Insurance Federation of Pennsylvania (Pennsylvania’s largest trade association of commercial insurers, with over 200 members) asked to join Tom’s brief, now found at 2013 WL 7176295.

The Federation’s resulting amicus brief characterized the lower court’s opinion as particularly ill-founded:  rather than rely on the well-settled and straightforward McDonald Supreme Court precedent dating from 1930 and re-affirmed as recently as 1999, the Superior Court instead

proceeded to strike out in search of a false choice, derived from muddled analysis, that misconstrues the relevant terms, relies on inapposite and unsupportive case law, calls for a jury determination that should be judicially decided, and leaves for that jury determination a “Heads-I-Win, Tails-You-Lose” option between two choices, neither of which in fact can possibly result in statutory employer liability to the general contractor.

Amici Curiae Brief of Shoemaker Construction Co. and Insurance Federation of Pennsylvania, Inc., in Support of Reversal,  2013 WL 7176295, at 19.  In his opinion reversing the lower court’s decisions, 2014 WL 1236499 at 3, Justice Saylor (writing for the full Supreme Court) noted the Federation’s argument that the Superior Court’s confusion lay with its incorrect reliance on the common-law definitions of the relevant terms employer, contractor and control, 2013 WL 7176295, at 20, 21 and 23, rather than their statutory definitions expressly stated in the workers compensation law, and well-settled since the 1930 McDonald decision.

The Federation’s amicus brief observed that the Superior Court’s “precipitous and poorly-reasoned” treatment of the Doctrine “leaves informed observers, at the least, concerned about the capacity of the judicial system to understand the statutory employer doctrine and the near-century long precedents that have sustained it,” 2013 WL 7176295 at 11, 32.  Grasping these contentions, Justice Saylor wrote that the amici “find the approach of the trial and intermediate courts here to be so ‘precipitous and poorly-reasoned’ as to raise concerns about the competency of the judicial system.”  2014 WL 1236499 at 3, citing 2013 WL 7176295, at 11, 32.

The Federation’s amicus brief also frankly acknowledged that “many interests (certainly the plaintiffs bar but also cross-claiming defendants), as well as many courts of Pennsylvania, have apparently continued to chafe at the tort protections available” to general contractors not called upon to actually pay workers compensation benefits.  2013 WL 7176295, at 11.  Justice Saylor, recognizing this candor, continued:

Shoemaker Construction Co. and the Insurance Federation of Pennsylvania, Inc., have filed an amici brief elaborating upon the essential points made by Worthington. These amici also note that the immunity created by the Act has encountered criticism and been treated with circumspection by the judiciary. See Brief for Amici Shoemaker Constr. Co. and Ins. Fed. of Pa., Inc., [2013 WL 7176295,] at 8–11.

2014 WL 1236499 at 3.  The Court substantially adopted the reasoning of the amicus briefs by reaffirming the Statutory Employer Doctrine, noting with respect to the Federation’s amicus brief, that “[t]he courts cannot abide the sort of distortions which occurred here as a counterbalance to previous decisions with which some may disagree. Were we to do so, we would not quell the sorts of apprehensions about the competency of the justice system expressed by several of Worthington’s amici.”  2014 WL 1236499 at 6.

Clients, Insurers and Contractors whose interests are affected by the Court’s decision, should consider the following:

• The Supreme Court’s opinion is a full-throated return to the statutory employer doctrine:  in short, general contractors or contractors who are defendants in suits involving injury to an employee of their subcontractor, and who meet the 5 McDonald criteria, should carefully examine whether their circumstances warrant a summary judgment motion.

• The Statutory Employer Doctrine’s return, however, does represent something of a double edged sword from the standpoint of insurers that write coverages for both general contractors and subcontractors:  general (or superior) contractors meeting the 5 criteria of the reinstated doctrine should, under this decision, be immune not just from tort claims of injured workers, but also from cross-claims of defendants such as subcontractors that are outside the contractual “vertical ladder” between the plaintiff’s employer and the general contractor.  Thus, when an insured is a general contractor, the Supreme Court’s decision is a good result.  On the other hand, when the insured is a subcontractor without any contractual relationship with the injured worker’s employer, then likely the doctrine’s immunity will represent increased exposure to that insured who neither enjoys the immunity, nor can it recover against those who do enjoy the immunity.  For these reasons, all contracts that an insured has entered into should be carefully examined in order to determine what effect the Statutory Employer Doctrine may have as to that party.

• Supporters of the lower courts’ treatment of Patton, such as the plaintiffs’ bar in Pennsylvania, have long argued that a general contractor should only be able to employ the statutory employer tort immunity defense if the GC actually paid workers compensation benefits (not surprisingly, cross-claiming defendants such as other subcontractors, or equipment or materials suppliers, make this argument as well).  In fact, in his concurring opinion, Justice Baer, who agreed in full with the lead opinion, nevertheless called on the legislature to change the law to limit the availability of the tort immunity defense to that extent (as it is the case in New Jersey).  The Pennsylvania legislature, however, is unlikely to change the law, in our view.

• An additional issue underlying the Patton decision, and which insurers and contractors still need to be mindful of, is the effect of so-called “Independent Contractor” clauses.  A principal point of confusion for both the trial court and the Superior Court was whether, or how, the facts of Patton were to be treated under an “independent contractor” status, rather than merely the “statutory employer” status.  As Justice Saylor observed, “The trial court’s substantive concern was with the principle that a general contractor is not a statutory employer relative to employees of an independent contractor,” citing Lascio v. Belcher Roofing Corp., 704 A.2d 642, 645 (Pa.Super.1997).  In fact, construction contracts frequently contain a provision that expressly calls for a subcontractor to be deemed “an independent contractor” of the General Contractor; the contract in Lascio had such a provision, while the relevant contract in Patton did not.  Justice Saylor, relying on the dissenting Judge Bender’s observations in the Superior Court decision, noted that in the cases such as Lascio considering such independent contractor clauses, “the general contractors in those matters attempted to contractually evade their statutory responsibilities to injured employees of their subcontractors through a declaration that the subcontractor was independent.”  2014 WL 1236499 at 2.  “In such scenarios, the dissent [of Judge Bender in the Superior Court] highlighted, the courts had essentially suggested that an estoppel theory may apply to foreclose immunity defenses to tort claims. See Patton, 43 A.3d at 496 (Bender, J., dissenting).”  2014 WL 1236499 at 2.

Because the “independent contractor” versus “statutory employer” statuses were the ostensible focus of the Superior Court’s erroneous analysis, the Supreme Court took the opportunity to bring additional clarity to those issues, despite recognizing that an independent contractor clause as in Lascio was not even present in the Patton contract. The Supreme Court confirmed that the “conventional relationship between a general contractor maintaining control of a jobsite and a subcontractor implicates the statutory employer concept relative to employees of the subcontractor working there.”  2014 WL 1236499 at 4.  While the Court recognized

that statutory employment does not extend to employees of “independent contractors,” it has clarified that the use of this phrase for the relevant purposes in connection with [workers compensation liability] is unique, as it pertains to contractors having a relationship with the owner which is not a derivative one and, accordingly, excludes conventional subcontractors.

Id.  In other words, as Justice Saylor explained, as far as concerns workers compensation liability, an “independent contractor” is “one having a distinct and independent contract with the owner,” distinguishable from the contractual relations in McDonald’s 5-part statutory employer analysis.

The effect of the Supreme Court’s Patton decision suggests that, if there is any question whether an “independent contractor” status applies, the first resort is to examine whether the 5 elements of the Statutory Employer doctrine apply; if they do, then it appears that, even if there is an Independent Contractor clause in the contract, that clause will not be given effect, but rather the statutory employer analysis will prevail.  However, as Justice Saylor observed, precedent suggests that construction contracts with an “independent contractor” clause may represent “an estoppel . . . to foreclose immunity defenses to tort claims.”  Because this issue remains uncertain, we recommend that the construction contracts be reviewed by counsel in order to properly assess the effects of such provisions, since they will very likely be controlled by case-specific facts.

• Copies of the Supreme Court’s opinion, as well as Tom’s brief, are available for distribution.  Simply email Tom at [email protected], or call him at (215) 732-3755.

• Tom and Davis, Parry & Tyler, P.C. have established a proven winning record in dealing with insurance and construction law as well as other issues associated with work site litigation, including interpretation of contractual defense and indemnification provisions, and comparable risk transfer issues.

Please feel free to contact Tom Tyler of the firm Davis Parry & Tyler, P.C., should you have any comments or questions regarding these significant developments.