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May 9, 2009

Employee vs Subcontractor/Owner Operator vs Statutory Employee

This question has made a comeback in blogs and publications that I have read over the last few weeks.  It has to do with the classification of employees or non-employees for Workers Compensation while on the job.  I had posted previously on the IRS rules for a subcontractor.  Feel free to use the search box to find the post Most courts, Departments of Insurance, and State Rating Bureaus have all followed the IRS rules.  

The issue at hand is the amount of control you have over a person while on the job as to whether they are an employee, subcontractor, or statutory employee.  There is a bit of a grey area on how to classify the employees.   

Recently a South Carolina court ruled that a material hauler was actually a statutory employee and had to apply for Workers Compensation benefits and could not bring a lawsuit against the employer's liability policy.  This is known as the exclusive remedy doctrine for Workers Compensation claim.  Once an employee receives benefits under Workers Comp, they can no longer look to sue the employer under different laws. 

The U.S. District Court, District of South Carolina dismissed a truck driver's negligence and breach of implied warranty suit against a manufacturer. The driver was classified as a statutory employee and not a subcontractor.  Therefore, he could only seek relief under the Workers' Compensation Act.  Under South Carolina law, where a worker's activities satisfy any of three tests to make him a statutory employee of a contractor, his exclusive remedy for an on-the-job injury is workers' compensation.

A driver for a hauling company was injured while disengaging landing gear on a truck at a manufacturer's facility. According to the driver, he was struck in the face and the eye by a piece of the landing gear handle while attempting to disengage it. The hauling company was hired to provide transportation services on an as-needed basis.

The manufacturer moved to dismiss the driver's negligence and breach of implied warranty suit, alleging the driver was its statutory employee, and thus could only sue under the Workers' Compensation Act. The District Court agreed, finding the driver met the test for being the manufacturer's statutory employee.

The court explained that a subcontractor will be a statutory employee if his activity is considered part of the owner's activity. This occurs if the activity meets one of three criteria: 

  1. Is an important part of the owner's business or trade; 
  2. Is a necessary, essential and integral part of the owner's business; or 
  3. It has previously been performed by the owner's employees.

The court found that because the manufacturer's employees had previously performed the loading and hauling, the driver performed the same duties as the manufacturer's employees. Further, the trailers that were towed were routinely loaded and unloaded by the manufacturer's own employees. Thus, he was considered a statutory employee and workers' compensation was the exclusive remedy for his injuries. 

I would say that the South Carolina Court had a very liberal definition of the rules for statutory employees.

Next Up - How Denying a Workers Comp claim can cost an employer big money.