Managing Liability Risks Posed by Independent Contractors

Transcription

1 USING CONTRACTORS? Managing Liability Risks Posed by Independent Contractors

2 Panel Jonathan H. Spergel, Esq. Manko, Gold, Katcher & Fox, LLP Christopher D. Ball, Esq. Manko, Gold, Katcher & Fox, LLP David Smith, Esq. Assistant Vice President and Counsel, Toll Bros., Inc.

3 Outline Employees v. Independent Contractors: Misclassification of employees and resulting liability Vicarious liability for actions of independent contractors The Toll Brothers Experience: One company s approach to managing independent contractors Best management practices to limit exposure to liability for actions of independent contractors

4 Employees v. Independent Contractors: Financial Benefits Advantages of hiring independent contractors: Reduce tax burden Federal Income Tax Social Security and Medicare Taxes Federal Unemployment Tax State Unemployment Tax Enhance ability to scale your workforce Pay for performance Reduced liability Resource link: Cohen and Eimicke. Independent Contracting: Policy and Management Analysis (August 2013) ( )

5 Employees v. Independent Contractors: Vicarious Liability Respondeat Superior = Let the master respond Serves to generally impose liability on employers for the torts of their employees committed within the scope of their employment Liability flows automatically from the employee s tort, regardless of care used by employer Widely adopted principle Employers, by contrast are generally not vicariously liable for torts of an independent contractor.* * Note exceptions to this general rule

6 Employees v. Independent Contractors: Vicarious Liability (cont d.) the reason that I am liable is this, that by employing [an employee] I set the whole thing in motion; and what he does, being done for my benefit and under my direction, I am responsible for the consequences of doing it. Duncan v. Findlater, 7 Eng. Rep. 934, 940 (H.L. 1839)

7 Classification of Employees and Independent Contractors General Focus: Who s controlling the work? Can the employer control just the result, or also how the work is done? The less control an employer has over a worker, the more likely the worker may be classified as an independent contractor. In practice, no single test is used to determine classification

8 Classification Tests: Common Law Common Law: Multi-factor test focused on control Behavioral Control Financial Control Type of Relationship Resource: IRS, Employer s Supplemental Tax Guide ( Used by Internal Revenue Service and 24 states Used to apply Federal Insurance Contribution Act, Federal Unemployment Tax Act, ERISA, and National Labor Relations Act Increasing weight given to entrepreneurial ability

9 Classification Tests: Economic Realities Economic Realities Test: focuses on whether the worker is economically dependent on the employer Employees include those who as a matter of economic reality are dependent upon the business to which they render services. Used by U.S. Dept. of Labor Origin: United States v. Silk, 331 U.S. 704, 713 (1947) Classification of workers under the Fair Labor Standards Act, Equal Pay Act, and Family Medical Leave Act In general, an employee, as distinguished from an independent contractor who is engaged in a business of his own, is one who follows the usual path of an employee and is dependent on the business that he serves.

10 Classification Tests: ABC Various state laws requiring some or all of the following for an individual to be classified as an independent contractor: (A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; (B) Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places or business of the enterprise for which such a service is performed; (C) Such individual is customarily engaged in an independently established trade, occupation, profession or business. Employed by 19 states including NJ (ABC) and PA (A&C)

11 Classification Examples Delivery drivers Freelance writers, photographers, designers Clerical workers Staff doctors at hospitals Pharmaceutical sales reps

12 Employees v. Independent Contractors: Misclassification liability Litigation fees Payment to misclassified employee (Overtime liability, reimbursements, benefits coverage) Burden of investigations Penalties to enforcing agency Taxes (including penalties for failure to withhold) Exposure to workers compensation claims Exposure to vicarious liability for acts of misclassified employee

13 Owner Liability for Acts of Independent Contractor - Tort Liability General rule: an employer is not vicariously liable for torts of an independent contractor. (See e.g., Phillips ex rel. Phillips v. Washington County Transp. Authority, 986 A.2d 925 (Pa. Commw. Ct. 2009). Exceptions include: Inherently dangerous activities Special precautions required Work in public locations Resource: Restatement (Third) of Torts: Phys. & Emot. Harm Where the independent contractor is hired for an activity involving a trespass, nuisance, or withdrawal of support Where statutes evidence intent to provide special protection

14 Owner Liability for Acts of Independent Contractor Other Examples Statutory Liability Examples: Environmental Laws (CERCLA, Clean Water Act) Joint and several, without regard to fault Potential for criminal liability (Note: XTO Energy litigation) Owner s Own Negligence Negligent hire Improper supervision Failure to inspect Failure to disclose/necessary precautions Caselaw example: Waste Conversion, Inc. v. Commonwealth, 568 A.2d 738 (Pa. Cmwlth 1990)

15 The Toll Brothers Experience: Managing independent contractors David Smith, Esq. Assistant Vice President and Counsel Toll Bros., Inc.

16 Managing Independent Contractor Liability Various Mechanisms to Minimize Liability: Due care in selection of independent contractor Proper disclosure to independent contractor Contractual indemnification Insurance

17 Contractual Indemnifications Generally What is an Indemnification Agreement? A transfer of the responsibility to pay from the Indemnitee to the Indemnitor

18 Contractual Indemnifications Generally (cont d) Know the purpose of the Agreement. Understand the jurisdiction s statutory, administrative, and common law and how each impacts an indemnification provision. Indemnification agreements are interpreted in accordance with the rules governing the construction of contracts in general, but courts will strictly construe any ambiguities against the indemnitee.

19 The Basics Define the key terms The Players Indemnitor shall defend, indemnify and hold harmless Indemnitee and its affiliates, and their respective directors, officers, members, partners, employees, shareholders, agents, representatives, attorneys, successors and assigns.

20 The Basics (cont d) Define the key terms The Claims any and all liabilities, claims, suits, causes of action, obligations, judgments, losses, damages, penalties, fines, demands, costs and expenses (including but not limited to attorneys fees) (collectively Claims ) arising out of Indemnitor s negligent acts or omissions, and/or the negligent acts or omissions of any of. First v. third party claims The Damages Use definitions to limit type and amount (e.g. define Losses )

21 Are There Exceptions to the Covered Claims? Must There Be? except to the extent that such claims are caused by the negligence or willful misconduct of Indemnitee.

22 Are There Exceptions to the Covered Claims? Must There Be? Can an indemnity provision require the indemnitor to indemnify claims caused by the indemnitee s own negligence? PA: generally disfavored, but will be upheld as long as language is clear and unequivocal. E.g., Jacobs Constructors, Inc. v. NPS Energy Servs., Inc., 264 F.3d 365 (3d Cir. 2001); Ruzzi v. Butler Petroleum Co., 588 A.2d 1 (Pa. 1991) NJ: valid as long as intent is clearly expressed in unequivocal terms. E.g., Mantilla v. NC Mal Assoc., 770 A.2d 1144 (N.J. 2001); Carvalho v. Toll Bros. Developers, 675 A.2d 209, 215 (N.J. 1996)

23 Are There Exceptions to the Covered Claims? Must There Be? (cont d.) But be aware of potentially applicable Anti-Indemnity Statutes/Policies in certain types of cases. Pennsylvania: 68 P.S. 491 Prohibiting engineer/architect related sole negligence clauses Valhal Corp. v. Sullivan Assoc., 44 F.3d 195 (Pa. 1995) New Jersey: N.J.S.A. 2A:40A-1--Prohibiting hold harmless/sole negligence indemnification in construction-related contracts Serpa v. N.J. Transit, 951 A.2d 208 (N.J. Super. Ct. App. Div. 2008) Bradford v. Kupper Assoc., 662 A.2d 1004 (N.J. Super Ct. App. Div. 1995) Leitao v. Damon G. Douglas Co., 693 A.2d 1209 (N.J. Super. Ct. App. Div. 1995)

24 Are There Exceptions to the Covered Claims? Must There Be? (cont d) Drafting options, from the perspective of the Indemnitee: GOOD:. except to the extent such Claims are caused by the gross negligence or willful misconduct of Indemnitee. BETTER:. except for Claims caused by the sole negligence or willful misconduct of Indemnitee. BEST:.whether or not such Claims are caused, directly or indirectly, in whole or in part, by the negligence or willful misconduct of Indemnitee. ** Prohibited if Anti-Indemnity Statute or Policy applies.

25 Are There Exceptions to the Covered Claims? Must There Be? (cont d) Compare with what the Indemnitor will want: an indemnity provision limited to its own negligence, so that no exceptions are needed. to the extent such Claims are caused by the negligence or willful misconduct of the Indemnitor.

26 The Impact of the Workers Comp Bar on the Scope of the Covered Claims Exclusive Remedy provisions in workers compensation laws immunize employer from tort actions filed by employee, but employee not barred from suing third-parties, i.e. the Indemnitee. But, parties can expressly contract to change this default result.

27 The Impact of the Workers Comp Bar on the Scope of the Covered Claims (cont d) For example: It is expressly understood that the indemnification obligations set forth herein cover claims by Indemnitor s employees, agents, independent contractors and other representatives, and Indemnitor expressly waives any defense to or immunity from such indemnification obligations and/or any subrogation rights available under any applicable state constitutional provision, laws, rules or regulations, including, without limitation, the workers compensation laws of any state. Without limiting the foregoing, Indemnitor, with respect to the indemnification provisions contained herein, hereby expressly waives any defense or immunity granted or afforded it pursuant to the Pennsylvania Workers Compensation Act, 77 P.S See, e.g., Snare v. Ebensberg Power Co., 637 A.2d 296 (Pa. Super. Ct. 1994); Ramos v. Browning Ferris Indus. of S. Jersey, Inc. 510 A.2d 1152 (N.J. 1986).

28 Other Important Provisions That Can Affect Indemnification Rights and Obligations Insurance Pass-through indemnification: transferring the indemnification obligations to another Name Indemnitee as additional insured in policy Careful about gaps in insurance coverage

29 Other Important Provisions That Can Affect Indemnification Rights and Obligations (cont d) Insurance Indemnitee s perspective: provide that the indemnity obligations are independent of any applicable insurance provided for in the agreement. E.g.: Indemnitor s agreement to defend, indemnify and hold harmless as set forth above shall not be negated or reduced by virtue of Indemnitor s insurance carrier s denial of insurance coverage for the occurrence or event which is the subject matter of the claim and/or its refusal to defend Indemnitor or Indemnitee.

30 Other Important Provisions That Can Affect Indemnification Rights and Obligations (cont d) Survival provisions Typically indemnification obligation said to survive the termination of the agreement. What happens if there is a material breach of the underlying agreement? Choice of law No uniformity among states in the interpretation of indemnification rights, obligations, remedies, scope

31 Other Important Provisions That Can Affect Indemnification Rights and Obligations (cont d) Limitation of liability/damages clauses Include separate provisions that cap indemnification amounts or set deductibles. Exclusive remedy? Notice requirements

32 Insurance Independent contractor agreement should specify need for insurance coverages and limits to be obtained and maintained. Automobile Commercial General Liability Workers Compensation Professional Liability Umbrella Policies

33 Insurance (cont d) Agreement should specify insurance company rating (A.M. Best) Owner should be added as an additional insured Policy should not be cancelled or terminated without adequate advance notice Certificate of insurance should be provided; copy of actual policy much better.

34 Insurance (cont d) Insurance Coverage for Indemnity Agreements Commercial General Liability Insurance Provides coverage for claims by 3rd parties arising out of the Insured s premises, operations, work or products Coverage A Bodily Injury & Property Damage Coverage B Personal Injury & Advertising Injury

35 Insurance (cont d) Insurance Coverage for Indemnity Agreements Is the assumption of liability in Indemnification Agreements Covered by the Indemnitor s GL Policy? YES, per the Definition of Insured Contract Lease of Premises; Other specifically listed types of Contracts; and that part of any other contract or agreement pertaining to your business under which you assume the tort liability of another party to pay for bodily injury or property damage to a third person or organization. Must be an otherwise Covered Claim Without insurance, Indemnification is only as good as the party providing it.

36 Additional Insured Status What Does It Mean to Be Added as An Additional Insured? You are an Insured on Someone Else s Policy of Insurance No distinction between insured and additional insured Coverage generally limited only by terms of Additional Insured Endorsement Who is getting the coverage? What is the extent of the coverage?

37 Questions? Jonathan H. Spergel, Esq. Manko, Gold, Katcher & Fox, LLP Christopher D. Ball, Esq. Manko, Gold, Katcher & Fox, LLP David Smith, Esq. - dwsmith@tollbrothersinc.com Toll Brothers