Wickert: Is Waiver of Third-Party Rights by Employee Enforceable?

Monday, October 2, 2017 | 0

There is seemingly no end to the attacks on a workers’ compensation carrier’s rights of subrogation and reimbursement when a third-party is liable for a work-related injury. In New Jersey, however, the Supreme Court will soon be deciding whether the employee is prohibited from suing a customer of his employer when forced to sign a waiver of this right as a condition of employment.

Gary L. Wickert

On Tuesday, lawyers for Philip Vitale and Schering-Plough Corp. — through successor Merck & Co. — argued their case to the New Jersey Supreme Court. With the Supreme Court consisting of three Republicans, three Democrats and one Independent, it is a coin toss as to how it will rule.

In Vitale v. Schering-Plough Corp., 146 A.3d 162 (N.J. App. 2016), cert. granted, 157 A.3d 842 (N.J. Dec. 5, 2016), Phillip Vitale was employed as a security guard by Allied Barton Security Services LLC, which contracted with defendant Schering-Plough Corp. to provide security services at Schering’s facilities. Vitale was required to sign a waiver of his right to sue any of Allied Barton’s customers as a condition of his employment.

The waiver read as follows:

As a result, and in consideration of Allied Security offering me employment, I hereby waive and forever release any and all rights I may have to make a claim, or commence a lawsuit, or recover damages or losses from or against any customer (and the employees of any customer) of Allied Security to which I may be assigned, arising from or related to injuries which are covered under the Workers’ Compensation statutes.

Although he was assigned to many of the defendant’s work sites, Vitale was never directly employed by Schering, which had its own in-house security employees. In August 2009, Vitale was injured while working at Schering’s work site. He received workers’ compensation benefits from Allied Barton and also filed a personal injury suit against Schering. A jury found Schering negligent and awarded $900,000 in damages. Schering appealed to the Court of Appeals.

As a matter of first impression, the Court of Appeals affirmed the trial court ruling that the contractual limitation on Vitale’s ability to sue Schering-Plough was unenforceable as against public policy expressed in case law, and contrary to the letter and spirit of the Workers’ Compensation Act (WCA). It held that the waiver was an impermissible contract of adhesion and that plaintiff could sue Schering.

As a result, Allied Barton and its workers’ compensation carrier would presumably also be entitled to recover its subrogation lien — a win for New Jersey small employers.

The Court of Appeals noted that not all employment contracts that limit the rights of employees are contracts of adhesion. However, when an employee has little to no bargaining power, and a contract is presented on “a take-it-or-leave-it” basis, the contract is one of adhesion.

Allied Barton’s waiver requirement constituted a contract of adhesion similar to the agreement to arbitrate contained in the employment application in Rodriguez v. Raymours Furniture Co., 138 A.3d 528 (N.J. 2016). The plaintiff had no ability to bargain. He had the choice of either signing the waiver as part of his being hired or turning down the needed job.

Although a court may enforce a contract of adhesion, such contracts are unenforceable if unconscionable. Exculpatory agreements are enforceable if they “clearly and unambiguously reflect the unequivocal expression of the party giving up his or her legal rights that this decision was made voluntarily, intelligently and with the full knowledge of its legal consequences.”

Some are unconscionable, however. For example, one may not contract away the statute of limitations in a case alleging a violation of the New Jersey Law Against Discrimination (LAD). Nor may one diminish by contract “a statutorily imposed duty,” nor execute “a pre-injury release from liability for intentional or reckless conduct.”

The waiver also creates a disincentive for the defendant to maintain a safe workplace for contractors working on its premises. Conduct that would be considered reckless or intentional under general tort law may result in injuries covered by the WCA and thus unlawfully waived by the disclaimer.

In the final analysis, when taking into consideration New Jersey’s history concerning joint employers, and the policy underpinning New Jersey’s workers’ compensation statute, the Court of Appeals concluded the waiver was unenforceable. Schering appealed to the New Jersey Supreme Court, which accepted the appeal and heard oral arguments on Tuesday.

Whether the Supreme Court will affirm the Court of Appeals and agree that the waiver is not enforceable, or overturn the decision and hold that an employee can knowingly sign away his or her rights to sue a customer of the employer, remains to be seen. New Jersey’s Supreme Court couldn’t be any more balanced politically.

During oral arguments, Justice Jaynee LaVecchia (Independent) seemed to imply that the employer was “buying peace” with Schering at the expense of its employee. Schering’s attorney disagreed, naturally, saying there was a “balancing of interests” with the parties involved. Schering claims that Vitale's signing away his right to sue a third party was an agreement he entered into as consideration for employment, period.

Allied Barton, however, argued that the employment situation for employees such as Vitale had changed in the last 25 years. Years ago, Vitale would have been an employee of Schering and would have been barred from filing a third-party action as a result of the exclusive remedy rule.

Contracting for security is a way to keep costs fixed, claimed the employer, who would benefit from a workers’ compensation subrogation recovery in a case like this, but was seemingly arguing for reversal, perhaps due to some indemnity agreement included in the contract.

Chief Justice Stuart Rabner (Democrat) asked the lawyers if the waiver was a violation of public policy. Allied Barton’s counsel answered “no”, adding that this was now the industry norm.

Justice Barry Albin (Democrat) added that enforcing the agreement would be at the expense of the employee. Vitale’s attorney, naturally, agreed with Albin, stating that the Court of Appeals got it right and that its decision should be upheld. He argued that the waiver was clearly a contract of adhesion.

One thing is certain: Reversal will result in two victims — the employee and small businesses across New Jersey. If the decision is reversed and the waiver is enforced, we can expect to see an industry trend wherein employees are required to sign such waivers as a condition of employment.

That would have a devastating effect on the positive effect subrogation has on holding down workers’ compensation premiums for small businesses in New Jersey and across the country.

Gary Wickert is a partner with the Matthiesen, Wickert & Lehrer law firm in Hartford, Wisconsin. This blog post is reprinted with permission.