Independent Contractor Liability Trap

04.01.15

When a general contractor uses subcontractors as a means to acquire labor for a project, the woes of handling one's own employees may seemingly dissipate. Amongst the pitfalls of being an employer, workers' compensation liability would appear to be a cost that a general contractor avoids by hiring independent contractors to complete a given task. However, failing to take the proper precautionary measures potentially leaves a general contractor facing the same consequences of an employer fraught with workers' compensation liability.

Consider the scenario posed by Zwick v. WCAB (Popchocoj). With the rising popularity of television programs romanticizing the business of renovating old homes and "flipping" them for a profit, a shrewd investor may find such an opportunity to be extremely inviting. In Zwick, a real estate agent turned house flipper hired a contractor to perform construction rehabilitation of residential properties at a weekly rate. The real estate agent appeared to follow the necessary protocols for maintaining an independent contractor relationship with the contractor by not controlling or directing the manner of the work to be performed. Thus, the real estate agent was not required to carry workers' compensation insurance.

After being assigned jobs by the real estate agent, the contractor would hire labor to complete the tasks associated with the project. The contractor hired the construction worker in Zwick, an undocumented worker, who was injured while installing hardwood flooring when an electric saw kicked back and amputated several of his fingers. The worker sought workers' compensation benefits from the contractor as he was deemed primarily liable for the injury, but the contractor did not carry workers' compensation insurance because he believed that he maintained an independent contractor relationship with the worker. However, the Workers' Compensation Judge (WCJ) found that this arrangement was merely illusory due to the contractor's control of the worker's daily activities.

Under Section 302(a) of the Workers' Compensation Act (WCA), the Commonwealth Court pinned secondary liability on the real estate agent as the "statutory employer." Section 302(a) allows a contractor to be liable for workers' compensation benefits when he "subcontracts any or all part of a contract" and the subcontractor has not secured payment of benefits. The term "contractor" is broadly defined as "a person who contracts with … another to have work performed of a kind which is a regular or recurrent part of his business, occupation, profession or trade …." Pursuant to this portion of the WCA, the real estate agent, although hiring an independent contractor and lacking any direct connection with the injured worker, found himself liable for the injuries.

The outcome in Zwick appears to yield significant exposure to any general contractor tackling a project which necessitates hiring subcontractors to perform labor, especially when a worksite presents the potential for serious injuries. However, several precautionary measures greatly reduce the possibility of finding oneself in the position of the real estate agent.

First, be sure to always formally establish an independent contractor relationship with your subcontractors via a trade contract. Not only does this clearly delineate roles of the parties, but a trade contract will memorialize the relationship for purposes of the Construction Workplace Misclassification Act, which threatens fines and possible criminal charges for a general contractor who fails to draft such a contract. Next, make sure that the trade contract requires any subcontractors who may be hiring employees to carry workers' compensation insurance. If an employee of a subcontractor is injured on the jobsite, it will not be necessary to seek secondary liability if the subcontractor, as the entity with primary liability, is properly insured. Furthermore, it is always beneficial to include an indemnification clause in the contract for any costs workers' compensation benefits paid as a result of an injury sustained by a worker hired by a subcontractor. This leaves you with a clearly established action against a subcontractor who fails to maintain a true independent contractor relationship with his workers. By exercising such practices, the risk of incurring unforeseen workers' compensation liability is greatly reduced and leaves a general contractor with added peace of mind.

By: Lucas Csovelak

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