The classification of workers as employees or independent contractors has a number of implications regarding liability for workplace related actions, including those under discrimination, wage and hour, tax, unemployment, and workers’ compensation laws.
The Fourth Circuit Court of Appeals recently addressed the issue in the context of state tort law claims brought by three individuals working for Eastman Chemical Co. in South Carolina. Zeigler v. Eastman Chemical Company, No. 19-1643 (4th Cir. Nov. 23, 2022). The court determined that the individuals were independent contracts who could bring state tort claims following their injuries in a 2016 workplace accident because South Carolina’s workers’ compensation statute did not provide the exclusive remedy for the workers’ injuries.
The decision stems from a 2016 industrial accident in which three contractors were severely injured, one fatally, when a pump exploded during maintenance.
The company sought to dismiss the individuals’ state-law personal injury claims, arguing that the workers were “statutory employees” under the state’s workers’ compensation law and, therefore, that the court lacked jurisdiction. The trial court agreed with the company and dismissed the claims. The workers appealed. Before issuing a decision on the substantive legal question, the Fourth Circuit waited on the South Carolina Supreme Court to decide a case that would impact the appellate court’s decision — Keene v. CNA Holdings, LLC, 870 S.E.2d 156 (2021). In Keene, the South Carolina Supreme Court held that “when an employer makes a ‘legitimate business decision’ to outsource a portion of its work, the contractors it hires to perform that work are not ‘statutory employees’ for workers’ compensation purposes.”
Workers’ compensation laws provide employees a more efficient mechanism to obtain compensation for workplace injuries. The tradeoff for employees is they do not have the right to bring tort claims for such injuries.
Under South Carolina law, however, not all independent contractors are exempt from the workers’ compensation law’s ambit. The workers’ compensation law applies, even to independent contractors, when an employer “undertakes to perform or execute any work which is part of his trade, business or occupation and contracts” with an independent contractor to complete that work.
The company argued that the three workers, while independent contractors, were injured while performing work that was part of its business and, consequently, that they fell within the exclusive reach of the workers’ compensation law.
Eastman opened its plant in Calhoun County, South Carolina in 1967. In 2011, the company sold the facility to DAK Americas LLC and terminated nearly all of its plant employees. Most of the 400 employees were subsequently employed by DAK who contracted with Eastman to operate and maintain various production lines at the plant. The effect of this arrangement was that DAK’s workforce consisted of employees who had previously done the same work by Eastman’s former, and now DAK’s, employees. DAK contracted with another entity to provide supplemental maintenance and other services at the plant.
There was no dispute that the company’s decision to outsource its maintenance and repair work was a legitimate business decision. The workers, therefore, were independent contractors and not statutory employees at the time of the accident and could bring state law tort claims based on their injuries.
Under Keene, “[w]hen a company makes the ‘legitimate business decision to outsource’ a portion of its labor force, the contractors it then hires are no longer part of its ‘trade, business or occupation.’” In this case, the company sold its plant in 2011 and laid off most of its 400 employees. The company “made a ‘legitimate business decision to outsource’ its operations and maintenance work to” the subcontractor who employed the three injured workers. The maintenance and repair work, the company decided, was not part of its trade, business, or occupation. For this reason, the appellate court reversed the district court’s judgment and remanded the case for further proceedings.
Zeigler provides an example of the impact of business and worker classification decisions. A company might have many legitimate reasons for altering its organizational structure. In making such decisions, one unintended consequence may just be the opportunity for the type of personal injury lawsuits that resulted here, which were not covered by South Carolina’s workers’ compensation law.