“Statutory Employer” Liability under the Workers Compensation Act: A Cautionary Tale.

By and | August 15, 2019

The Kansas Workers Compensation Act, like similar acts in many other states, imposes liability both on the actual employer and on the “statutory employer.” K.S.A. § 44-503(a). See also Ariz. Rev. Stat. § 23-902(A); Colo. Rev. Stat. § 8-41-401; Minn. Stat. § 176.215, subd. 1; Mo. Rev. Stat. § 287.040; Neb. Rev. Stat. §  48-116. In Kansas, this statutory employer liability attaches under two circumstances:

  • if the employee performs work that is part of the alleged statutory employer’s trade or business; or,
  • if the employee was injured while performing work required under the alleged statutory employer’s agreement to perform work for a third-party.
    K.S.A. § 44-503(a). So, depending on the circumstances, an owner, contractor, intermediate subcontractor or other business, which is not the actual employer, may still have “statutory employer” liability for workers compensation benefits.

While this liability always exists, it usually doesn’t matter. The liability matters when there’s an injured employee, and the  actual employer does not have workers compensation insurance. Then the statutory employer is then stuck with the monetary obligation to provide workers compensation benefits.

A July 26, 2019 Kansas Court of Appeals decision provides a good example of how statutory employer liability works. See Ramirez v. Garay’s Roofing, LLC, 2019 WL 3367831 (Kan. Ct. App. July 26, 2019). In Ramirez, the Court found a property management company, Kelly Enterprises, liable for workers compensation benefits owed to an injured employee, Mr. Ramirez. Mr. Ramirez worked for Garay’s Roofing (not Kelly) as a painter. Kelly contracted with Garay’s to roof and paint a new apartment complex. Mr. Ramirez was injured on that job and ended up with nearly $190,000 in medical bills. Because Garay’s did not have workers compensation insurance, after the case proceeded through the administrative process, the Kansas Court of Appeals had to decide whether Kelly was liable for workers compensation benefits as a statutory employer.

The Court of Appeals determined that Kelly was, in fact, liable as a statutory employer. The evidence showed that Kelly contracted with Garay’s to do work that was part of Kelly’s trade or business, and Mr. Ramirez was injured while performing that work. In relevant part, Kelly engaged in the business of building apartment complexes, and when injured, Mr. Ramirez was painting, which is work that is performed as part of building apartment complexes. The fact that Kelly did not ever directly employ painters or other construction workers was irrelevant. Kelly often acted as a general contractor in building apartment complexes, which it variously sold or managed to make money as part of its business model. Notably, Kelly tried to avoid statutory employer liability by arguing that it acted in good faith reliance on Garay’s having workers’ compensation insurance.  But the court held that there is no good faith-insurance exception to K.S.A. § 44-503(a).

It may not be possible for some businesses to avoid potential workers compensation liability as a statutory employer. But it is possible for any business to mitigate the risk of getting stuck with a monetary obligation to pay:

  • The business should use contracts when hiring employers that are obligated to maintain workers compensation insurance.
  • The contracts should require the employers to maintain workers compensation insurance as required by state law for the entire time that any employee may be injured on the job.
  • The contracts should require the employers to provide evidence of compliance with the insurance requirements.

The best evidence of compliance with the insurance requirements consists of the applicable workers compensation policy, complete with all declarations and endorsements. Securing this best evidence, however, is often impractical. While not entirely reliable, completed and executed certificates of insurance in the proper form are more often used and usually more practical to secure.

Beyond having a contract that imposes these obligations, the business should follow-up and insist that the contracting employer actually provide the proof of insurance required by the contract. When that proof is provided, the business should make sure that the proof is complete and correct (e.g., that the appropriate certificates are used and properly completed). Then if the insurance policy period expires before the project is complete, the business should follow-up again to secure current, complete and correct proof of insurance.

Christina ArnoneScott Hecht

Contact Christina Arnone or Scott Hecht for more information.