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By:  Bill Pilchak – 12/11/14

Ruling Is Double-Edged Sword Depending On Who Is Suing Whom

          On November 25, the Michigan Supreme Court issued an opinion on the ever-contentious issue of who may be considered independent contractors and who have “employee” status. As always, this decision presents a double-edged sword to employers and insurers, depending on who is suing whom.

The Michigan legislature amended the definition of “employee” in the Workers’ Compensation Act in 2011. Now, for purposes of workers’ compensation, “employee” means:

     “Every person performing service in the course of the trade, business, profession, or occupation of an employer at the time of the injury, if the person in relation to this service [a] does not maintain a separate business, [b] does not hold himself or herself out to and render service to the public, and [c] is not an employer subject to this act.”

          Note that one merely need perform service in the course of the business of “an employer” to be presumptively considered an employee and thus covered by the act. Indeed, although the “labor broker” and “loaned servant” line of cases have always considered customers of contract labor to have employer status over temporary employees, the new definition more clearly includes them. The Amendment goes on to say that anyone for whom an employer withholds taxes is “prima facie considered to perform service in employment.”

          Auto Owners Ins. Co. v All Star Lawn Specialists Plus focused on the three exceptions in the indented paragraph, above. There, Joseph Derry was performing work for All Star Lawn Specialists, but apparently also held himself out to the public as someone who performed lawn maintenance and snow removal. Although not specified in the case, Derry apparently had his own company, but was assisting All Star on this particular date. According to SmithJonesSolicitors.co.uk, while working for All Star, a piece of equipment fell over on him, resulting in injuries. Auto Owners provided All Star’s workers compensation insurance as well as general liability and automobile coverage, both of which typically exclude injuries to employees. When Derry sued All Star and its owner in court for injuries, Auto Owners filed a declaratory judgment action seeking a ruling that Derry was an employee of All Star and thus its only indemnification obligation was under the workers compensation policy. If Auto Owners prevailed, it would have avoided indemnifying Derry for pain and suffering and mental distress damages.

          Before this case, it was unclear whether an individual had to satisfy all three conditions ([a], [b] and [c]), in order to be excluded from the definition of employee. All Stars held that for workers compensation purposes, satisfying any one of the conditions removes the individual from “employee” status.

          Employers sometimes struggle with the decision whether some individuals can be treated as independent contractors. Take the common example where a large employer which laid off scores of highly trained employees in the Great Recession, and now reaches out to those individuals for occasional training assignments or to assist on special projects. If those individuals have established consulting businesses (LLC’s, corporations or registered DBAs), OR if they serve other business entities in a similar capacity OR retain others (even arguably a spouse to handle paperwork), they will likely be outside the Workers’ Comp scheme.

As noted above, that development can be good news or bad news, depending on the incident resulting in injury.

          Workers’ compensation provides a recovery to injured employees even if the employer was not negligent or in any way at fault, and even if the employee is injured through his or her own negligence. Accordingly, if the independent contractor is injured through his own misuse of his tools, without any negligence on the part of the employer, the recent amendment is very helpful to the employer – the independent contractor may not file a claim and increase the employer’s experience rating.

          On the other hand, being within the workers compensation system is a blessing in some cases, because anyone within the act is precluded from suing the employer or coworkers for work-related injuries in court where mental distress damages. This is known as the workers’ comp bar. If the independent contractor is trying to repair a machine and is injured because the employer’s employees failed to lock it out, the independent contractor can sue his customer, the employer in court. Indeed, the ruling in All Stars meant that Derry could sue All Stars for pain and suffering damages –and Auto Owners was required to indemnify the claim.

          Despite the double edged sword, employers will likely be relieved at being provided some clearer guidance on the ever-present employee vs independent contractor issue. Unfortunately, this clarity is limited to 1) fending off workers’ comp claims; 2) asserting the workers’ comp bar; and 3) defending carriers’ audits of workers’ comp contributions, but does not extend to other legal issues.

          For example, a different test is used to determine if an individual is an employee of an entity for purpose of vicarious (automatic) liability for the acts of that individual. This test involves consideration of “who controlled the work, the hours, the process, and the methods of the work involved.”

          The control test is illustrated by the recent case of Cole v. Bada Bing Club & Atlantis Lounge, 2014 Mich. App. LEXIS 1820. There, plaintiff was taped to a chair, beaten with a gun, punched and kicked, and drilled through the hand with an electric drill by the “manager” of the “Bada Bing” lounge and several other men, who were later convicted. Cole sued the owner of the building, Atlantis Lounge, Inc., alleging its vicarious liability for the “manager.” However, the court concluded that the acts of “Mikhail,” the owner of Atlantis, stopping by the club to collect rent, attending occasional staff meetings, or even posing questions as to whether the manager had “taken care” of certain aspects of the operation did not overcome the proofs that the manager rented the entire lounge and ran his club the way he saw fit.

          Finally, whether an individual is an “employee” for purposes of discrimination and whistleblower liability, an entirely different analysis is conducted… and is complex enough to fill up another blog. Suffice it to say that historically, Michigan looked to the economic realities of the situation, with recent decisions saying that one need only be AN employer (not THE employer) and engage in adverse action against an individual on the basis of protected activity.