Statutory Employment And Peripheral Employees: Reforming Scc 42-1-400

By Thomas Gagne, Esq.

For the last two years, Jacob “Jake” Oak had worked as a contract security guard for Apex Automotive in Bedford, South Carolina. He did well and was well liked. Management especially appreciated Jacob’s “squared away” attitude. Rumor had it that Apex was about to offer him a full – time position, which was fine as far as Jacob was concerned. Working directly for Apex not only meant better pay and job security, it meant finally having decent medical insurance.

Unfortunately, Jake’s bright future came tumbling down one evening when, as he was making his usual rounds, he stumbled into a hole recently excavated by the company’s maintenance team, part of a project of laying high speed internet cable.

Jake’s fall left him seriously injured. His ACL and MCL ligaments in his right knee were completely severed. If Jake wanted to walk again he would need a total knee replacement, but, even with the replacement, it was doubtful he would be able to return to work as a security guard. But if Jake did not want to spend the rest of his life in a wheelchair he would have to risk the surgery.

The operation was a success. Unfortunately, post-operative sepsis set in which led to the amputation of Jake’s right leg above the knee. An active person all his life who enjoyed cycling and softball, Jake’s physical limitations triggered a severe case of depression. Anti-depressants proved ineffective, but the carrier refused to refer him to a counselor. Jake realized he needed an attorney.

The attorney filed a workers’ compensation claim against Jacob’s direct employer, National Security Services, and a premises liability suit against McDonald Aircraft, his indirect employer, based upon its failure to properly cure or warn of a dangerous condition.

Six months later National’s carrier settled the workers’ compensation case. Jake was awarded permanent and totality disability benefits plus future medicals. McDonald, on the other hand, moved to dismiss the negligence action, contending that Jake was a “statutory employee,” therefore immunizing it from suit under the Exclusivity Rule. The court agreed with McDonald and dismissed the suit with prejudice, despite the fact that McDonald’s primary business was the manufacture of airplanes, not security, and that McDonald had always subcontracted its security force at the Bedford facility. Except for legal costs, McDonald and its carrier walked away scot-free.

The facts in the fictional but by no means fanciful Oak v. Apex are not uncommon, and the result is arguably correct under current law, but is it equitable? Or is it time to reform South Carolina’s statutory employee law in cases like Jake’s?

A Brief Primer On South Carolina’s Workers’ Compensation Law and Contract Employees

Employees injured within the scope of their employment have long enjoyed the right to be compensated by their employer and its workers’ compensation insurance carrier. A seven-member commission, headquartered in Columbia, administers the workers’ compensation system in South Carolina. They individually adjudicate cases, meet en banc to hear appeals, make rules, and generally manage the agency.

Any injury arising out of and in the course of one’s employment is compensable. Injured employees need not prove negligence in order to recover damages. Damages are generally less than what a claimant could receive via a tort suit for a variety of reasons – pain and suffering is not a cognizable damage, the range of damages are more or less predetermined by the worker’s salary, the severity of the injury(ies), and the body part(s) involved, etc. Other features of the process include streamlined adjudication, relaxed evidentiary rules and an Exclusivity Rule which prohibits injured employees from seeking damages by any means other than by a workers’ compensation claim.

Now, when one employer (call her the “direct employer” — usually an employment agency) “leases” an employee to a second employer (the “indirect employer”), the resultant “indirect hire” may or may not be deemed an employee of the indirect employer for purposes of workers’ compensation benefits, depending on the application of the statutory employment statute SCC 42-1-400.

The determination that an indirect hire is a statutory employee of the indirect employer can be a double-edged sword. If the direct employer does not carry workers’ compensation insurance, the indirect employer assumes the burden of compensation — good news for the indirect hire. However, if the direct employer carries workers’ compensation insurance then the indirect employer is off the hook for workers’ compensation benefits. * If the indirect employer has also been negligent, as illustrated in Jake’s case, she is immune from tort liability per the Exclusivity Rule. If, however, the indirect hire is not a statutory employee of the indirect employer, she may pursue tort damages from the indirect employer and workers’ compensation damages from her direct employer, subject to an offset. **

SCC 42-1-400

The central issue is: who qualifies as a statutory employee?

SCC 42-1-400 controls the determination of statutory employee status. It reads: When any person . . . undertakes to perform or execute any work which is part of his trade, business or occupation and contracts with any other person . . . for the execution or performance by or under such subcontractor of the whole or any part of the work undertaken by such owner, the owner shall be liable to pay any workmen employed in the work any compensation under this title which would have been liable to pay if the workmen had been immediately employed by him.

If an indirect hire qualifies as a statutory employee of the “owner” under SCC 42-1-400, she is considered an employee of the indirect employer, entitled to workers’ compensation benefits, but barred from suing the owner in tort per the Exclusivity Rule. South Carolina’s legislature enacted SCC 42-1-400 in order to provide workers’ compensation benefits to subcontracted employees whose direct employers fail to carry workers’ compensation insurance. It was designed to prevent employers from hiring indirect employees as a tactic to avoid carrying workers’ compensation insurance. If the indirect employee is deemed a statutory employee under SCC 42-1-400, and, providing other requirements are met, the indirect employer bears the burden of compensation, probably if the direct employer is also insured, definitely if it is not insured.

The key question in determining the status of an employee within this context is: what does “part of his trade, business or occupation” mean? Over the years, the decisional law in this area has been lively to say the least.

Ost vs. Integrated Products

Ost v. Integrated Products, 296 S.C.241, 371, S.E.2d 483 (1988) does a good job delineating the factors courts consider when determining an employee’s status: 1.) Is the activity an important part of the organization’s business? 2.) Is the activity a necessary, essential and integral part of the organization’s business? 3.) Has the activity previously been performed by the owner’s employees? 4.) Are the employee’s duties part of the ordinary and customary business of the owner/employer? A movant need only establish one element to prevail. Courts are also free to consider the totality of facts and circumstances in any given case, and, since the question is fundamentally jurisdictional, the court may consider the entire record. See Marchbanks v. Duke Power Company, 190 S.C. 336, 2S.E.2d 825 (1939), Boseman v. Pacific Mills, 193 S.C.479, 8 S.E.2d 878 (1940), Bridges v. Wyandotte Worsted Company, 243 S.C.1, 132 S.E.2d 18 (1963), and Poch v. Bayshore Concrete Products 405 S.C. 369 747 S.E.2d 757 @ 761 (2013).

Ost evinces our legislature’s intention to protect indirect hires by making it easy for them to claim statutory employment status. Its first two tests bear this out as all employees are, normatively, important, essential, integral and/or necessary to a business’s operations. Put another way, what manager would admit she has personnel on the payroll who are not important and so forth to an operation, especially during this era of belt tightening? The challenge, from an indirect employee’s point of view, is that employers use SCC 42-1-400 to claim immunity from tort actions which could otherwise be brought by that very class of employee the statute was designed to protect. This has led to some arguably unjust results, as the fictional, but by no means fanciful, case of Oak vs. McDonald illustrates.

Should a broad standard apply when determining if an indirect hire is a statutory employee of a particular employer for the purposes of her receiving workers compensation benefits, and another, more stringent one, when a colorable claim of negligence can made against that same employer? In other words, should there exist a double standard when negligence may be present, thus allowing some indirect hires two bites at the apple? Another related question: does SCC 42-1-400 consider the inferior station of indirect hires, especially peripheral indirect hires, in the workplace vis-à-vis their direct counterparts? The answer to these questions may lie in the nature of “temporary labor,” policy justifications for the Exclusivity Rule, and the principles of premises liability law.

Direct hires occupy a privileged position within a business. They enjoy greater benefits than indirect hires, including those most prized — medical insurance and pension plans. Direct hires are more likely to receive raises and promotions, are usually harder to fire, and are less likely to lose their jobs during economic downturns. Indirect hires, on the other hand, occupy a second-class position within a firm. There are no mutual obligations between the indirect hire and the owner, no future expectations on the part of either party, other than the purely quid pro quo of a salary for labor. They enjoy few, if any, of the advantages direct hires take for granted and are generally less expensive to employ. Even their nickname – “temp” – rings pejorative.

Now, because of their preferred position, direct hires are more aligned with the business owners’ interests than are their indirect brethren. They are, in the context of this analysis, extensions of, or alter egos of, the owners. Within this context, the Exclusivity Rule makes sense since “owners” cannot sue themselves. Conversely, indirect hires have much less “skin in the game,” especially those whose labor is incidental to the business’s main product or service or is not normally performed by direct hires. These indirect hires can be likened to guests, or “business invitees,” and, as such, should be afforded the highest standard of care, at least according to the traditional principles of premises liability law.

Yet when it comes to being able to sue in tort, or rather not being able to sue in tort, the law treats direct and indirect hires equally, providing the indirect hire qualifies as a statutory employee. Why should indirect hires (particularly peripheral hires) share this disadvantage with direct hires if they are not otherwise equal? Does this violate notions of equal justice? Equally important is the question: was SCC 42-1-400 meant to be used as an employer liability shield?

An owner might respond that no duty exists to ameliorate the “second class” status of indirect hires by granting them extra rights. Differences in employee status are one of business’ defining features. Moreover, the law does not aim to make everyone equal. It merely requires that parties similarly situated receive equal treatment. Besides, one does not hear an indirect employee complain about being treated like a direct employee when SCC 42-1-400 operates to vouchsafe their workers’ compensation benefits.

An indirect hire might respond in a couple of ways. Revising the Exclusivity Rule or SCC 42-1-400 to allow some indirect hires to recover in tort is not intended to make employees “equal.” It is a logical consequence of their “guest-like” status within a business. And if reform results in a double standard, so be it. There is nothing wrong per se with a double standard if it reflects differences ab initio in the status of the parties under consideration. Moreover, revising the law would incentivize owners to make their property safer. The decrease in injuries would more than offset the costs of eliminating dangerous conditions. A safer workplace also promotes healthier employees, less absenteeism, greater productivity, and a more conscientious business culture. The firm’s image benefits as “poor housekeeping” indicates a management that tolerates carelessness.

Of course, seeking legislative action is always a reach. If the aim is reform, a more efficient method might be for the courts to narrow their reading of SCC 42 – 1-400. In fact, as the cases below show, our courts have already made a few tentative steps in that direction.

Harrell, Abbott and Olmstead

When determining the status of indirect hires, South Carolina and federal courts have compared the relative duties of indirect and direct hires and concluded that indirect employees who perform duties direct hires do not normally perform are not considered statutory employees. See Harrell v. Pineland Plantation, Ltd, 337 S.C. 313, 323, 523 S.E. 2d 766, 771 (1999). Following a multistate review of the decisional law in this area, the court in Dickerson v. Eastman Kodak Company, 569 F. Supp. 1221 (D.S.C. 1983) echoes the Harrell test:

…from these cases it will be readily seen that the test is not one of whether the subcontractor’s activity is useful, necessary, or even absolutely indispensable to the statutory employer’s business, since, after all, this could be said of any repair, construction or transportation service. The test is whether this indispensable activity is in that business normally carried on through employees rather than independent contractors.

Id at 1224 (emphasis added). The “normally performed” test extricates us from the labyrinthine collection of standards which have developed over the years. It is relatively unambiguous, depending on how one defines “normally,” and, since it is not as broad as the “important, necessary, essential or integral” test, many indirect hires would still be considered employees subject to the Exclusivity Rule – good news for indirect employers. It also preserves the totality of circumstances test when the facts are not readily dispositive.

Post – Harrell, another test emerged in a line of cases involving indirect hires transporting raw materials. In Abbott v. the Limited Inc., 338 S.C. 361, 526 S.E.2d 513 (2000) and Olmstead v Shakespeare 354 S.C. 426, 581 S.E.2d 486 (2003), the court held that an indirect hire of a common carrier is not a statutory employee if transportation is not part of the primary or core business of the employer. The core business of the owner in these cases was manufacturing, not transportation. This doctrinal shift defeated the defendant s’ contention that the employee was an “important, necessary, essential or integral” part of the employer’s business and therefore a statutory employee.

Abbott and Olmstead are significant because the court could have easily found the employees to be statutory employees. Factories need raw material. Raw material requires transportation. Transporting raw material may not be directly related to the manufacturing process, depending on how stringently one defines “directly,” but it’s hard to argue that transportation is not an important, necessary, essential or integral part of the manufacturing process. Remarkably, the Abbott and Olmstead courts simply declined to apply the traditional standard, striking out in a new direction altogether.

At first, Abbott and Olmstead appeared to replace the Ost standards with the “primary business” test, but then they put on the brakes by limiting the new standard to transportation cases. Nor do these cases overrule the “important, necessary, essential or integral” tests. Granted, the facts in these types of cases can be convoluted, but do Abbott and Olmstead reflect an unnecessary flexibility (and hence unpredictability) in this area of the law? Do they aggravate the problem by not specifically overruling the fundamentally illogical “important, necessary, essential or integral” tests?

Keene v. CNA Holdings, LLC, 426 S.C. 357, 827 S.E.2d 183 (S.C. App. 2019), involving an employee named Seay, picks up where Abbott/Olmstead leaves off by extending the “primary business” test to businesses other than transportation. In Keene, Seay’s direct employer, Daniel Construction Company, had contracted with Celanese to handle Celanese’s maintenance. Seay was performing maintenance work at the Celanese polyester plant in Spartanburg, South Carolina when he contracted lung cancer.

He filed a negligence claim against Celanese for failing to warn or cure unsafe environmental conditions. Celanese moved to dismiss on the grounds that Seay was a statutory employee. The lower court denied the motion. Celanese appealed. The Court of Appeals upheld the lower court’s ruling. Keene accomplished two important things. It vindicated the new standard articulated in Olmstead and Abbott and extended their logic to cover all trades and businesses. However, it is important to note that Keene still did not overrule the “important, necessary, essential or integral” test.

The New “Gig” Economy

Oliver Wendell Holmes once remarked: “The life of the law has not been about logic. It has been about experience.” Holmes hyperbolizes. Law has not been entirely about logic. But in response to Holmes’s implied question – what is law – perhaps this helps: good law respects the past, eyes the future, and equitably balances disparate interests in such a manner as to effectuate public policy. This includes the interests of non-parties. Businesses important to the economic well-being of a community might very well decide to locate elsewhere if obliged to compensate some indirect hires for injuries proximately resulting from owner negligence.

For the time being, however, communities needn’t worry. It remains easy for an employer to argue that an indirect hire is a statutory employee. All she need do is invoke the first or second tests in Ost. But as stewards of the law, we must ask ourselves whether current standards are unfair to the indirect hire who must bear the same burden as direct hires in these circumstances, even if their professional status in all other respects is grossly unequal.

The traditional model of signing on to a company for the duration is obsolete. As global competition grows, business will continue to look for ways to cut costs, and the “gig,” or “temp” economy will grow — along with the political influence of its workers. Gig employees will begin to demand better treatment. After all, labor is still labor, and sweat is still sweat, regardless of the formal legal relationship between employer and employee.

Will our courts create a double standard allowing peripheral indirect hires to be considered statutory employees for purposes of workers’ compensation (using a relaxed standard) while allowing the same indirect hire to sue in tort (using a more stringent test)? The latter could be accomplished by simply dispensing with the “important, necessary, essential or integral” tests in cases of alleged owner negligence. The courts would then have the option of applying the “primary business,” the “similar duties,” or the “totality of circumstances” test as set forth in Abbot, Olmstead, Harrell and Keene. But first we need to decide if reforming SCC 42-1-400 in favor of indirect hires is a good idea, and, if so, what “good law” will get the job done?

*This may be an unsettled point of law.
** In other words she may not “double dip.”

Thomas Gagne is a lawyer, writer, and lecturer. He lives with his wife Judy in Simpsonville, South Carolina.