Taking care of sick or injured workers should be a top priority.
How to navigate subcontracting & workers’ compensation issues in the construction industry

In spring 2020, the world slowed to a halt as the coronavirus pandemic reared its head. Despite many industries shutting down, many construction projects continued to move forward — even in the face of concerns related to the ability of COVID-19 to spread among individuals in close proximity.

The owners of property where construction continued to take place (as well as the general contractors working at those sites) have not only had to be concerned about the possibility of general workplace injuries, but were also forced to consider the new threat that workers could contract and spread COVID-19 — causing employees to miss work for an extended period of time and seek workers’ compensation benefits. Regardless of the type of injury or illness causing employees to miss time from work, the analysis of who will ultimately be responsible for the injured employee’s medical and income benefits does not change. However, the question of what company will be responsible for compensable work injuries becomes complicated in the context of larger construction projects with multiple tiers of subcontractors.

The first step in the analysis is to identify and characterize each potential liable party. This begins with determining which entity is the injured employee’s “direct employer.” In essence, the direct employer is the party that hired the employee, who instructed the employee to the jobsite, the party which may also be paying the employee, and in many cases, the party who is directly overseeing the employee’s work. These aspects of the employment relationship may vary from case to case.

 

 

In Georgia, an employer with three or more employees is required to carry workers’ compensation insurance. So, if a subcontractor—or in this instance, the direct employer — does not have valid insurance, it may be nearly impossible for an injured employee to obtain workers’ compensation benefits from his direct employer. That is often seen where the direct employer is insolvent, skips town or even files for bankruptcy. As a result, the injured employee must look up the “contractual ladder” to a higher subcontractor or the general contractor to seek benefits.

The contractual ladder includes all parties directly contracted with one another, beginning with the owner or general contractor through subcontractors and down to the injured employee’s direct employer. The simplest example demonstrating a contractual ladder would include the general contractor of a construction project, which hires a first-tier subcontractor, which, in turn, contracts with a second-tier contractor (the injured employee’s direct employer).

Within this contractual ladder there may include additional intermediate contractors, increasing the number of potential liable parties. That is because all intermediate contractors and general contractors in the contractual ladder have the potential liability for workers’ compensation benefits to the injured employee as what is referred to as a “statutory employer.”

While there is only one direct employer, there can be several statutory employers involved. The number of statutory employers is dependent on how many intermediary employers there are in the chain of command. This can be complicated to determine. So, how is a statutory employer defined? For a party to be deemed a statutory employer, a statutory employer relationship must exist — that requires four specific elements to be met:

  1. There must be a contractual relationship (as discussed above) or some type of agreement between the direct employer and the alleged statutory employer
  2. The party must be covered by the Georgia Workers’ Compensation Act (i.e., the party must employ three or more employees, requiring that party to have workers’ compensation insurance)
  3. The injured employee must have sustained the injury in question “on, in or about the premises” where the contractor has undertaken work
  4. The injured employee must also have employee status and not be an independent contractor

 

 

Once all statutory employers are identified, the next question becomes, “Who is responsible?” The first answer is the direct employer, who is always primarily responsible. However, if the direct employer has failed to obtain and keep valid workers’ compensation insurance and is otherwise insolvent, the next party to be liable would be the intermediate contractor, which hired the direct employer.

That trend would continue up the contractual ladder if each next possible liable party is uninsured and otherwise insolvent. Therefore, if an intermediate contractor is also uninsured, then the injured employee would assert a claim for benefits at each level of contractor up the contractual ladder all the way to the general contractor, who would then be ultimately liable to the injured worker for the payment of benefits.

It is important to note, that there would be no division of liability amongst any parties within the ladder, only a linear progression of total liability. The first party for which liability would attach, would be the party to bear the entire cost of the benefits paid to the employee. There is a caveat to this, however.

If the general contractor or other intermediate contractor (i.e., any party other than the direct employer) is forced to be bear the costs for payment of benefits, that party is capable of recouping those amounts paid from the other parties back down the contractual ladder who would have otherwise been liable to the injured worker but for their insolvency and/or uninsured status.

Again, for the ultimate liable party to be responsible for payment benefits, it must first be proven that the direct employer and all other lower-tier subcontractors were uninsured. As such, the ability to recoup expenses from the uninsured (and likely insolvent) parties would be a rarity.

 

Determining which party is liable also requires that the injured work assert a claim for benefits against the direct employer first. If they do not, then the injured worker is unable to assert a claim for benefits against a statutory employer. Even where the employee knows its direct employer is uninsured, they’re still required to first assert the claim for benefits at the bottom of the ladder before moving up.

If the employee mistakenly files a claim against a statutory employer instead of the direct employer, the employee will later see the claim dismissed for the running out of the statute of limitations, dissolving their right to assert a claim to other parties involved. This is another reason why properly determining the liable parties from the outset of the claim is the first step.

Understanding the ladder of liability in workers’ compensation claims will help you better understand your liability as a contractor, which may ultimately protect you and your business from detrimental claims in the long run.