Busenlener: Immunity and the Two-Contract Theory

Thursday, August 3, 2023 | 0

In Louisiana, when a company undertakes to execute any work that is a part of its trade, business or occupation and contracts with any subcontractor for the execution of such work, the company is entitled to the exclusive remedy protection of Louisiana Laws Revised Statutes Section 23:1032.

James T. Busenlener

The company will be liable to pay workers’ compensation benefits to any such statutory employee, just as if the statutory employee had been immediately employed by it.

Statutory employer immunity (“exclusive remedy protection”) for a contractor in a typical construction setting is governed by Section 23:1061(A), which provides that the principal, as a statutory employer, is granted the traditional exclusive remedy protections of Section 23:1032 and shall be liable to pay workers’ compensation benefits to any employee employed in the execution of the work or to his dependent. A statutory employer relationship is created in two instances:

• When a party undertakes to carry out any work that is part of its trade, business or occupation by means of a contract with another party.
• Or when a party contracts to perform work and sub-lets any portion of the work to another party (the “two-contract” theory).

The two-contract theory is set forth in Section 23:1061(A)(2) and exists whenever the services or work provided by the immediate employer is contemplated by or included in a contract between the principal and any person or entity other than the employee’s immediate employer. The two-contract theory applies when three conditions are met:

• The principal enters into a contract with a third party.
• Pursuant to the contract, work must be performed.
• In order for the principal to fulfill its contractual obligation to perform the work, the principal enters into a subcontract for all or part of the work performed.

Two-contract statutory employer status contemplates relationships among at least three entities:

• A general contractor hired to perform a specific task.
• A subcontractor hired by the general contractor.
• An employee of the subcontractor.

The purpose behind the two-contract theory is to establish a compensation obligation on the part of the principal that contractually obligates itself to a party for the performance of work and then subcontracts with intermediaries whose employees perform any part of that work.

Work performed by the subcontractor is considered part of the contractor’s trade, business or occupation if it is an integral part of or essential to the ability of the contractor to generate goods, products or services. This is known as the “Thibodeaux integral relationship” test.

Courts have stretched the statutory employer fiction to its limits, including the concept of what is “integral” in the principal contractor’s business. The 5th Circuit held that the replacement of overhead walkways, which were used daily at a Chevron storage facility to access hatches above storage tanks, was an integral part of Chevron’s business, such that Chevron was the statutory employer of the contractor’s employees who were hired to replace said walkways, regardless of whether the job might be considered extraordinary construction.

A statutory employer is entitled to exclusive remedy protection and indemnity, even if it isn’t called on to actually make workers’ compensation benefit payments. The principal contractor is also a statutory employer that, when sued by an employee of a subcontractor, may seek indemnity from the subcontractor for any compensation payments made by the contractor under this law. In other words, if the immediate employer does not pay workers’ compensation benefits to one of its employees, the principal contractor is obligated to provide the benefits as a matter of law.

A contract between a contractor/‌owner and a subcontractor can specify that the contractor/owner is considered a statutory employer. While a contract that specifies that an owner is a statutory employer and the subcontractor is an independent contractor might be construed against the drafter of the contract, the party suing the owner will have to be sure to introduce evidence of this conflict within the contract.

On June 20, the Louisiana Court of Appeals ruled in a case involving the two-contract theory of employer immunity. In Stonetrust Com. Ins. Co. v. TBT Contracting Inc., Joshua and Melissa Luft entered into an agreement with TBT to “provide all material, equipment, labor and supervision to construct the additions and renovations” to their residence. TBT then subcontracted Naquin Electrical Inc. to do the electrical.

On June 11, 2019, Gary Andras, an employee of Naquin, was injured when he fell through a hole cut for an attic access door to the floor below. As a result of the accident, Naquin’s workers’ compensation carrier, Stonetrust Commercial Insurance Co., paid medical and indemnity benefits to Andras. Stonetrust filed a third-party subrogation suit against TBT, which filed a motion for summary judgment, arguing that Stonetrust’s claims against TBT wholly arise from the work-related accident and that it was the statutory employer of Andras pursuant to Section 23:1061 and was thus immune from liability.

Stonetrust opposed the motion, contending that TBT failed to set forth competent summary judgment evidence establishing the contracts, the obligations it contracted to perform, the obligations it subcontracted to third parties and what its alleged statutory employee was doing at the time of the accident. The trial court granted TBT’s motion for summary judgment. Stonetrust appealed, maintaining that the trial court erred in granting summary judgment before there was a factual determination that the employee was injured while performing work in furtherance of the two-contract relationship.

The Court of Appeals reversed, holding that TBT did not meet its burden of proof showing that there was no genuine issue of material fact relating to it being the statutory employer of the employee. Despite some dissents, the court explained that an employer seeking to avail itself of tort immunity bears the burden of proving its entitlement to immunity. Furthermore, immunity statutes must be strictly construed against the party claiming immunity.

The ultimate determination of whether a principal is a statutory employer entitled to immunity is a question of law for the court to decide. In support of its motion for summary judgment, TBT offered the affidavit of its president, Mr. Thompson, who attested that TBT was hired by the Lufts to serve as a general contractor for the complete renovation of their residence pursuant to a contract that he prepared and submitted to them on Feb. 21, 2019, which was approved and signed by Mr. Luft on March 13, 2019. Thompson further attested that TBT, in turn, entered into a subcontract with Naquin to provide labor, material, equipment and supervision for all electrical work and that Naquin invoiced TBT directly for all work performed at the Luft residence.

The contract, subcontract and invoices were attached to Thompson’s affidavit. TBT contends that its contract with the Lufts and its subcontract with Naquin, in connection with Thompson’s affidavit, establish that it was the statutory employer of Andras under the two-contract theory and is thus statutorily immune from tort liability.

In reversing the trial court, the Court of Appeals said that, while the assertions set forth in Stonetrust’s petition may amount to a judicial confession that Andras was injured while performing work in furtherance of the alleged two-contract relationship, TBT failed to attach Stonetrust’s petition as evidence in support of its motion for summary judgment, and the balance of TBT’s supporting documents did not establish this material fact.

James T. Busenlener is a partner with the Matthiesen, Wickert & Lehrer law firm's New Orleans office. This blog post is reprinted with permission.