Part Two: Review of Insurance Compliance Provisions Under the Longshore Act

In Part One, we reviewed the provisions in the Longshore and Harbor Workers’ Compensation Act (LHWCA, the Act, or the Longshore Act) that deal with the maritime employer’s obligation to insure exposures under the Act and the consequences of failing to obtain coverage as required.

In Part Two, we will discuss problematic issues that arise in the process of deciding whether coverage is required.

These issues are frequently encountered in the context of a general or prime contractor hiring subcontractors.  The prime contractor has concerns involving liability as a statutory employer under section 4(a) of the Act, election of remedies under section 5(a), and as a possible borrowing employer.

Note:  Section 4(a) states, “Every employer shall be liable for and shall secure the payment to his employees of the compensation payable under sections 7, 8, and 9 (33 USC sections 907, 908, 909).  In the case of an employer who is a subcontractor, only if such subcontractor fails to secure the payment of compensation shall the contractor be liable for and be required to secure the payment of compensation.”

This is the statutory employer provision that may result in the general contractor being liable for claims filed by employees of an uninsured subcontractor.

This involves a discussion of the existence of an employer-employee relationship, since this is basic to the question of who is covered by workers’ compensation law, i.e., an employee, and who is responsible for meeting the insurance compliance provisions, i.e., an employer.

It will also involve a discussion of several other terms and phrases that are frequently used carelessly, leading to coverage ambiguities.

Problematic Terms

Here are the terms along with the meanings I will assign to each:

• “Maritime employer” means an employer that employs at least one worker who meets the status and situs requirements for coverage under the LHWCA.
• “Employee” means a maritime worker who meets one of the tests (see below) for determining whether an employer-employee relationship exists.
• “Independent contractor”, a term much (ab)used through careless usage, is frequently (but not always) used interchangeably with the term “self-employed”.
• “Self-employed” means not an employee and thus not covered by workers’ compensation statutes such as the LHWCA.
• “Sole proprietor” can have several meanings.  It can mean an unincorporated contractor/subcontractor, but it can also mean an individual who has formed a corporation and who may or may not be an employee.
• “Sub-contractor” means a person performing work that is either a sub-contracted part of a larger project or who is doing work that is not ordinarily performed by the prime contractor’s own employees.  This can be an employee, an independent contractor, a sole proprietor, or a “borrowed employee”.

General Principles

The LHWCA imposes an insurance requirement on “employers” for the benefit of “employees”.  Self-employed individuals are not employees.

“Sub-contractor” is not the equivalent of “independent contractor”, although a sub-contractor can be an independent contractor.  A so-called “independent contractor” may or may not be self-employed.

A so-called “sole proprietor” may be a self-employed individual, a subcontractor, and/or an independent contractor, and the facts, not the label, will determine whether there is an employer-employee relationship.

There are no exclusions in the Act for corporate officers, sole proprietors, business owners (if they are also employees), partners, or small businesses.

The terms “independent contractor”, “subcontractor”, “sole proprietor”, and “self-employed” should not be used interchangeably.

Note: These terms have specific meanings and interpretations, are significant for many aspects of tax law and employment law, and the Fair Labor Standards Act has its own tests. Our discussion in this Longshore Insider blog is limited exclusively to issues of coverage under the Longshore Act (LHWCA).

Employer-Employee Relationship

There is no definition in the Act to help us determine whether an individual is an employee or a self-employed independent contractor. The common law has developed several tests designed to identify the nature of the relationship.

There is a nine-part test from the jurisprudence. It is well designed to complicate the issue, since many of the factors are broad and can frequently go either way, and it is rarely unanimous.

1. Extent of control the “employer” exercises over the details of the work,
2. Whether or not the worker is engaged in a distinct occupation or business,
3. The kind of work, whether usually done under direction or by a specialist,
4. What skill is required,
5. Who provides the tools and equipment,
6. The method of payment,
7. Is the work part of the regular business of the “employer”,
8. The intent of the parties,
9. The length of time involved.

Another approach is the right to control the details of the work test.  There are four elements:

1. The right to control the details of the work,
2. The method of payment,
3. The furnishing of equipment,
4. The right to fire.

Then there’s the relative nature of the work test noted by commentator Larson*:  “The character of the claimant’s work or business – how skilled it is, how much of a separate calling or enterprise it is, to what extent it may be expected to carry its own accident burden and its relationship to the employer’s business, that is, how much it is a regular part of the employer’s regular work, whether it is continuous or intermittent, and whether the duration is sufficient to amount to the hiring of continuous services as distinguished from contracting for the completion of a particular job.”

So that should clear it up.

But seriously, there’s a lot at stake in getting this right.

Perhaps we can simplify the analysis by summarizing the various elements.  Take these questions for example:

• Does the company control what the worker does, or is there a wide range of judgment and discretion as to how the work will be performed?  
• How is the worker paid?  
• Does he submit invoices, is he paid by IRS Form 1099, or is he paid by payroll check with deductions for taxes and employee-type benefits such as vacation and insurance?  
• Who supplies the tools and equipment?  
• Is it a short-term relationship only for a particular job?  
• Is there a written contract?

Note: The tests for identifying an employer-employee relationship and for identifying a borrowed employee are essentially the same.

Note: The conventional tests for determining whether an employer-employee relationship exists are not a good fit for dealing with situations such as whether a worker is an employee of a corporation of which he is the owner or sole member.

Scenarios and Contexts

Is the “independent contractor” incorporated?  Incorporation creates a separate legal entity.  Can this independent contractor be considered an employee of this separate legal entity, even if he is the sole owner of the corporation?  Can this scenario turn a self-employed individual into an employee of the corporation of which he is the sole owner?

The sole proprietor is the owner of a business, and if it is incorporated (either through an LLC or by conventional incorporation) he may be the owner of the business and also its only employee.  He can meet the definition of “employee” of the separate incorporated legal entity.  This can lead to bizarre scenarios.

For example, consider the implications for a general contractor under section 4(a) (statutory employer) of the Act if the subcontractor in the role of incorporated sole proprietor fails to secure the payment of compensation to the only employee, himself.  Can he file a workers’ compensation claim against himself, i.e., his alter ego, the corporation?  Can he file a claim against the general contractor under section 4(a)?

I know.  This is fun.  Unless you’re an underwriter.

Note: Just a brief, superficial note about Limited Liability Corporations (LLC).  This is a corporate structure that relieves owners of personal responsibility for the LLC's debts and liabilities and establishes the LLC as a separate legal entity.

LLCs are owned by one or more individuals (who are called members).  If there is only one owner, it is a single-member LLC.

The term “sole proprietorship” is most definitely not synonymous with LLC.  An unincorporated sole proprietor has unlimited personal liability.

An LLC can elect to be taxed as a sole proprietorship, a partnership, an S Corp., or a C Corp. under the IRS Code. An S Corp. allows pass-through taxation, with each owner paying personal income tax. A C Corp. pays corporate income taxes, and owners pay tax on distributions.

An LLC's “Articles of Organization”, filed with the Secretary of State for the appropriate state, can provide the LLC with the ability to have employees and for members to be paid as employees.

So, to be sure about whether your sole proprietor or independent contractor who you contract as a subcontractor may or may not be an employee, you have to determine whether the individual is incorporated and whether that corporation or LLC has the authority to have employees.

What is the best way to approach this type of situation?

Remember, the problem is how to determine if an employer-employee relationship exists so that the Act’s compliance provisions can be satisfied. There are situations in which this is very difficult without extensive research and the drawing of conclusions based on a best guess.

For a general contractor, I would assume that your subcontracts involve employer-employee relationships. There should be proof of insurance unless there is clear and convincing evidence that no employer-employee relationship exists anywhere. For example, an unincorporated independent contractor is probably not an employee, but if the so-called sole proprietor or independent contractor is incorporated, be careful.

If you are a worker, in the event of an injury, you should assume that you are an employee (of someone) until proven otherwise.

If you are an underwriter, your default assumption should be that an employer-employee relationship exists in any scenario and only back off that assumption if there is clear and convincing evidence otherwise.

If you are a broker, take the safe approach and assume an employer-employee relationship unless it is clear there is none.

The best approach is to play it safe.

Reference:

*Larson, Arthur. Workmen’s Compensation Law (commonly cited as Larson’s Workers’ Compensation Law). Section 43.52.