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Understanding the Potential Liability of General Contractors When Entering Into Subcontracts

Hurricanes Katrina and Rita caused too much destruction in south Louisiana in 2005. Construction work has boomed in both southwestern and southeastern Louisiana as a result of both storms. Many of these construction jobs involve general contractors and subcontractors. Injuries are common in construction industry and employees that get injured in one of these construction jobs are entitled for workers’ compensation benefits. What happens if the one that gets injured is an employee of a subcontractor?

Compensation benefits to the injured worker usually shouldered by subcontractor’s insurance. The insurer is mandated by law to be responsible for the benefits. However, there are cases that the subcontractor doesn’t have insurance or argues that the claim is not covered by worker’s compensation benefits. If this is the case, the worker may demand the general contractor to give the benefits. At this point, the question to be addressed is whether or not the general contractor is the “statutory employer” of the injured worker.

What Is Statutory Employment?

Statutory employment generally involves a business that accepts work related to its trade, business or occupation and enters an agreement with another business to perform either part or all of that work. The statutory employer of the second business’s employees is the first business. However, this rule about statutory employer is limited to two specific situations.

The most common contract in the construction industry involves a general contractor that is in the “middle of two contracts.” The general contractor is referred to as the principal in La. R.S. 23:1061. To best illustrate the first situation, allow Company A as a construction company that enters into a contract with homeowner to perform construction work on a residential building. Company A in turn contracts Company B, a plumbing company, to manage plumbing work. Given this scenario, it turns out that Company A is the general contractor engaging in work that is part of its occupation, business, or trade and has entered into an agreement with the homeowner to do the job, then contracted with Company B to perform some task. This puts Company A in the middle of two contracts, one with the homeowner and another with the subcontractor Company B. Thus, Company A is responsible in offering workers’ compensation benefits to any injured employee on the job of Company B.

The second scenario wherein the principal is considered as statutory employer is when it engages into a written contract with another party that makes the principal as the statutory employer. In this situation, there’s no need for the principal to be in between two contracts to be liable for workers’ compensation benefits for employees of the other company. As an example, allow Company A as construction company that purchases, refurbishes, and then sells commercial property. It needs roofing professionals to perform repairs to the roof, so it hires a roofing company to do repairs. Company A is not in the middle of two contracts here as the contract only between Company A and the roofing company. The agreement between Company A and the roofer which specifies that Company A is the statutory employer of the roofing company’s employees makes Company A responsible for giving workers’ compensation benefits for those employees that get injured while working on its roof.

Statute La. R.S. 23:1061 also states that even with a contract specifying a statutory employer relationship, subcontractor’s employees can rebut the presumption of an employment relationship between the principal and them. The only way to overcome this rebuttable presumption is to show that the work is not an important or integral part to the principal’s ability to generate his services, products or goods. This provision is common when an injured employee filed a suit against the general contractor in tort and in defense the general contractor asserts that it is immune in tort lawsuit for being a statutory employer. The injured employee can rebut the presumption by showing that the subcontractor’s work was not essential or integral part to the ability of the general contractor to generate its services, products or goods.

The general contractor then considered as responsible for the worker’s compensation benefits of the subcontractor’s injured employees but the general contractor has the right to seek indemnity against the subcontractor for any benefits that it may need to pay. This right is stipulated in La. R.S. 23:1063 wherein the actual value of the right is dependent on the subcontractor’s financial solvency. Contact John Fox & Associates LLC in New Orleans for work injury attorneys at your convenience.