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Nagy: Coverage Issues and General Contractor/Subcontractor Allegations

  • State: New Jersey
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A common issue arises when an employee works for an employer that does not maintain proper workers’ compensation coverage and alleges that there is a general contractor with coverage from whom it will seek benefits.

Keith E. Nagy

Keith E. Nagy

As noted in a recent article, claims that are denied for lack of coverage based on a canceled policy often result in ongoing litigation regarding issues related to whether the policy was canceled effectively. In these cases, the claimant’s counsel will often seek to bring any potential entities with whom the petitioner’s employer worked and argue that they are liable for benefits as a “general contractor.” Therefore, an issue that can be simultaneously tried in connection with whether a policy was appropriately canceled is whether there is a liable entity, pursuant to Section 79.

Section 79 of the state Workers’ Compensation Statute provides for penalties to employers that fail to carry workers’ compensation insurance, but also provides a pathway for liability to a general contractor when a subcontractor does not have coverage. The language of Section 79 provides:

Any contractor placing work with a subcontractor shall, in the event of the subcontractor’s failing to carry workers’ compensation insurance as required by this article, become liable for any compensation which may be due an employee or the dependents of a deceased employee of a subcontractor. The contractor shall then have a right of action against the subcontractor for reimbursement.

The purpose of the foregoing is to protect the employee by permitting him to recover from a general contractor that gets direct benefit of the employee’s work.

In order for Section 79 to apply, three essential elements must be met:

  • “(1) a contractor, (2) a subcontractor and (3) failure by the subcontractor to carry workman’s compensation insurance.”
  • “A contractor is ‘[o]ne who formally undertakes to do anything for another; specifically, one who contracts to perform work, or supply articles.'” 
  • A subcontractor is noted to be “one who enters into a contract with a person for the performance of work which such person has already contracted with another to perform. In other words, subcontracting is merely ‘farming out’ to others all or part of work contracted to be performed by the original contractor.”

The foregoing criteria are highly fact sensitive and will often result in a number of fact witnesses testifying as to the issue of whether there was a general contractor/subcontractor relationship. As a result, some of the following examples provide guidance to litigants.

In Pollack v. Pino’s Formal Wear & Tailoring (1992), Pino’s Formal Wear decided to expand its business and have an extension put on the building to add dry cleaning services. Pino’s Formal Wear arranged for the co-respondent, Ernest Polgardy, to purchase the dry cleaning machinery and to have it installed.

The decedent-employee was hired by Polgardy to install burners and to hook up the machines. The decedent-employee fell from a ladder and was injured. He ultimately died shortly thereafter from a number of conditions related to alcohol withdrawal and liver failure. The petitioner-dependent argued that that due to the decedent-employee’s fall, he was not able to drink, which resulted in liver failure and death.

The petitioner-dependent filed claim petitions against Pino’s Formal Wear, alleging that it was liable for benefits as the general contractor and that Polgardy, his direct employer, was an uninsured subcontractor. 

The Appellate Division found that Pino’s Formal Wear was not a general contractor within the meaning of NJSA 34:15-79. It noted that Pino’s Formal Wear relied upon Polgardy’s skill and knowledge to purchase and install the dry cleaning machinery with no restrictions placed on him. The relationship between Pino’s Formal Wear and Polgardy was that of owner and contractor, not general contractor and subcontractor. Therefore, petitioner’s claim was dismissed.

In Brygidyr v. Rieman (1954), the petitioner was injured while washing windows for a building that was owned by respondent Schwaben Halle. The petitioner filed claim petitions against Schwaben Halle and Federal Window Cleaning Co. as an alleged uninsured subcontractor. The petitioner testified that he was regularly employed by another company but that in his free time he worked for Federal and that on its instructions, he was washing the windows of Schwaben Halle.

Schwaben Halle, however, asserted that it was a cultural and singing society that owned and operated the building. The Appellate Division found that under these circumstances, Schwaben Halle could not have been a contractor and that “the washing of windows was not in the line of Schwaben’s regular business, and the contention that it had contracted to keep the windows clean is without merit ... To hold otherwise would mean that any property owner who contracted for services would be liable for injuries sustained by the contractor’s employees.”

In a more recent matter involving an action in the Superior Court filed by the carrier asserting that an employer withheld material information about its operations and use of subcontractors and, thereby, underpaid its workers’ compensation premiums, the Appellate Division affirmed the trial court’s order of the policyholder to pay the carrier additional unpaid premiums, plus interest, costs and counsel fees in the amount of $145,231.

In Fournier Trucking Inc. v. New Jersey Manufacturers Ins. Co. (2020), the trial court found that the employer-policyholder, a freight company that facilitated the transport of goods, was liable under NJSA 34:15-79 to provide workers’ compensation coverage for the employees of uninsured motor carriers it used for hauling shipments to its customers. The Appellate Division noted that customers hired the employer-policyholder “to consolidate and transport goods; Fournier Trucking consolidates the goods itself, and then subcontracts with the carriers to perform the transportation. Therefore, Fournier Trucking is a contractor, and the carriers it uses to fulfill part of its contracts with shippers are subcontractors.”

The policyholder-employer attempted to argue that the carriers it contracted with are independent contractors and therefore are not liable for workers’ compensation benefits.

However, “to the extent that the carriers maintain employees, those carriers are statutorily obligated to maintain workers’ compensation coverage, as is any other employer within the state. By operation of NJSA 34:15-79(a), to the extent those carriers fail to satisfy their statutory obligation, Fournier Trucking, as the general contractor, is obliged to provide benefits to any carrier employee who suffers an injury while providing services under Fournier Trucking’s general contract."

In discussing the argument that the carriers were independent contractors, the Appellate Division stated that “a company can choose to use its own workers to carry out its responsibilities, or it can retain independent companies who may also qualify as subcontractors to discharge some of those tasks. When it does the latter, the law of our state requires the contracting company to assure that the subcontractor’s employees have adequate workers’ compensation insurance.”

The issue of Section 79 liability for alleged general contractor/subcontractor disputes involve the various parties exchanging information regarding the petitioner’s work, the work site or assignment wherein the petitioner was injured, and investigation into any and all entities who were involved in the business which was related to the petitioner’s work. Carriers should perform initial investigation with their insureds regarding any possible subcontractors they work with, and claimant’s counsel should investigate with the client any information regarding his work.

Keith E. Nagy is a shareholding attorney with Capehart Scatchard, a defense law firm in New Jersey. This post appears with permission from John H. Geaney's New Jersey Workers' Comp Blog.

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