Defending Third-Party Tortfeasors: Seeking Indemnification from Employers of Injured Plaintiffs

The Workers’ Compensation Act (the “Act”) subjects employers to strict liability for injuries sustained by employees while in the course and scope of employment. The Act also makes workers’ compensation benefits the employee’s sole and exclusive remedy against the employer. Under this system, employers assume liability without regard to fault for work-related injuries in exchange for limitations on the amount of liability, while the injured employee obtains relatively swift and certain benefits without having to prove liability.

In many instances, however, a third-party is exclusively or concurrently at fault for an injured employee’s work-related injuries. This is particularly true in the case of the construction industry, where activity on a worksite can potentially subject the property owner, general contractor, and subcontractors to liability for injuries sustained at the worksite. In this situation, all but the employer of the injured employee may be subject to civil suit for damages arising out of the work-related injury. (Lab. Code, § 3852.)

A third-party sued by an injured employee may cross-complain against any party from whom it seeks indemnity by alleging the employee’s alleged harm is attributable, in whole or in part, to the cross-defendant. However, as discussed below, the Act precludes third-party tortfeasors from seeking indemnification from the injured employee’s employer, absent a written agreement with the employer executed prior to the injury.

Labor Code Section 3864: No Equitable Or Implied Indemnity Against Employer

“If an action as provided in this chapter prosecuted by the employee…against the
third person results in judgment against such third person, or settlement by such third person, the employer shall have no liability to reimburse or hold such third person harmless on such judgment or settlement in absence of a written agreement so to do executed prior to the injury.” (Lab. Code, § 3864.) Accordingly, in the absence of an agreement providing otherwise, the employer is not liable to indemnify third-party tortfeasors from whom the employee has recovered for his or her work-related injuries, even if the employer was also at fault:

[A]n employer that provides compensation coverage has no further liability for workplace injuries to an employee. Therefore, if a non-negligent third party pays damages for an employee’s injuries that are attributable in whole or in part to the negligence of the employer, the [Workers’ Compensation] Act’s limitations on employer liability preclude the third party from obtaining equitable indemnity from the employer.

(Privette v. Superior Court (Contreras) (1993) 5 Cal.4th 689, 698.) Further, indemnity is proscribed even where the employee mistakenly believes that he or she is employed by someone else. (Angelus Chevrolet v. State of California (1981) 115 Cal.App.3d 995.)

Case law interpreting Labor Code section 3864 makes clearan agreement providing indemnity must be executed prior to the injury, and execution of the agreement “requires that both parties sign the agreement prior to the injury.” (Hansen Mechanical, Inc. v. Superior Court (1995) 40 Cal.App.4th 722; City of Oakland v. Delcon Associates (1985) 168 Cal.App.3d 1126; See Lockheed Missiles & Space Co. v. Gilmore Industries, Inc. (1982) 135 Cal.App.3d 556 – holding that, notwithstanding employer’s commencement of performance called for by contract, indemnification agreement contained in contract was not executed under Labor Code section 3864 because employer did not sign the contract prior to employee’s injury.)

Public Policy Limitations

The purpose of Labor Code section 3864 is to eliminate the employer’s liability under an equitable, implied, or comparative indemnity theory when the employee’s injury is due to negligence or partial negligence of a third party. (Kaiser Engineers, Inc. v. Grinnell Fire Protection Systems Co. (1985) 173 Cal.App.3d 1050.) The Legislature enacted the statute because implied indemnity imposed a greater burden on the employer than was contemplated under the workers’ compensation system. Otherwise, the employer’s protection of a limit on the economic consequences of claims made under the system could be readily circumvented. (Up-Right, Inc. v. Van Erickson (1992) 5 Cal.App.4th 579.) Because of these strong public policy limitations, California courts refuse to enforce contractual indemnity provisions contained in contracts entered into by an employer and a third-party, unless that contract was signed by both parties prior to the employee’s injury. This is true even if performance of the contract was undertaken by the employer and third-party prior to the injury.

Exception: Employer Has “Stepped Outside His Normal Role As An Employer” / Employer’s Conduct Is “Outside The Normal Risk Of Employment”

Notwithstanding Labor Code section 3864, a third party indemnity claim may lie where the employer has “stepped outside his normal role as an employer” and has contributed to the employee’s injury. (See Fermino v. Fedco, Inc. (1994) 7 Cal.4th 701, 713-714.) The Fermino court identified a tripartite system for classifying injuries arising in the course of employment:

First, there are injuries caused by employer negligence or without employer fault that are compensated at the normal rate under the workers’ compensation system.
Second, there are injuries caused by ordinary employer conduct that intentionally, knowingly or recklessly harms an employee, for which the employee may be entitled to extra compensation under [Labor Code] section 4553.

Third, there are certain types of intentional employer conduct which bring the employer beyond the boundaries of the compensation bargain, for which a civil action may be brought.

(Id. at p. 714.) Case law elaborating on the third category has ruled the following types of intentional employer conduct constitute instances in which the employer “steps outside his normal role as an employer” and may be subjected to civil action:

• Intentional infliction of emotional distress and battery, based on a supervisor’s “campaign” of persistent personal harassment of an employee that included acts of physical molestation and deliberate humiliation;
• Employer demoted and constructively discharged employee for no reason other than his support for a fellow employee, who was the victim of sexual harassment, and for his refusal to testify untruthfully or withhold testimony in the course of a Department of Fair Employment and Housing investigation.

In certain “exceptional circumstances,” a separate civil action may lie where the employee’s injury results from conduct by the employer or workers’ compensation insurer that is outside the normal risk of employment or workers’ compensation claims process. (Charles J. Vacanti, M.D., Inc. v. State Compensation Insurance Fund (2001) 24 Cal.4th 800, 819-820; Unruh v. Truck Insurance Exchange (1972) 7 Cal.3d 616, 630.) A two-part test determines whether the workers’ compensation exclusivity rule bars a cause of action against an employer or insurer:

• First, the court must consider whether the alleged injury is “collateral to or derivative of” an injury compensable under the Act (and thus within the scope of the exclusive remedy provision); and
• Second, if it is, the court must consider whether the alleged acts or motives that establish the elements of the cause of action fall outside the risks encompassed within the compensation bargain.

(Charles J. Vacanti, M.D., Inc. v. State Compensation Insurance Fund, supra, 24 Cal.4th 800, 811-812.) Initially, the court should consider only the acts themselves, and not the motive behind the acts: “[T] he critical issue is whether the alleged acts, bereft of their motivation, can ever be viewed as a normal aspect of the employer relationship or claims process.” (Id. at pp. 819-820.) In addition to the acts themselves, the motive element of a cause of action may take it outside the exclusive remedy provisions. This exception to exclusivity is limited, however, to cases in which the employer’s motive and cause of action violate a fundamental public policy of the state (e.g., employment discrimination and wrongful termination claims). (Id. at p. 823.)

The following employer misconduct has been held to be such an “exceptional circumstance” as to be outside the normal risks of the employment relationship and therefore not subject to the Workers’ Compensation Appeals Board’s exclusive jurisdiction:

• Violence or coercion;
• False imprisonment;
• Fraud concealing an employee’s workplace injury;
• Discrimination or harassment;
• Employee discharge in violation of public policy (Tameny claims).

Takeaway

Parties to a contract should, of course, always sign the contract prior to performance. This holds especially true for the construction industry, where property owners, general contractors, and subcontractors are all linked to common construction project and potentially liable for any number of injuries related to or arising out of the project.
ABOUT THE AUTHOR
Morgan Van Buren is an associate at Tyson & Mendes LLP. He specializes in personal injury and high net worth insurance issues. Contact Morgan at 858.263.4107 or mvanburen@tysonmendes.com.

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