Everyone is familiar with the terms “upstream contractor” and “statutory employer” as they are defined in the South Carolina Workers Compensation Act, specifically Sections 42-1-400 through 42-1-450. The underlying reason for statutory employment is to provide the benefits of compensation to those workers who are exposed to the risk of the “owner’s” business and put the burden of paying compensation on the organizer of the enterprise.
42-1-410 puts liability on the contractor who is “upstream” or higher tiered for injuries to workers, even if they are not the direct employer. The effect of these statutory employment provisions is to impose absolute liability of an immediate employer on the owner/and or general contractor even though they are not actually the immediate employer. Subsequent statutes allow the upstream contractors to bring in other subcontractors. Conversely, workmen may seek recovery directly from their immediate employer.
However, a large number of litigated cases involve situations where statutory employment is the primary issue. Statutory employment issues are very common in construction cases. For example, a framer falls off of a roof, and he files a claim against the subcontractor who hired him. If that subcontractor is without insurance, the claim will be amended to include the higher tiered subcontractors. Generally speaking, the lowest tier subcontractor with coverage will be responsible, if the accident is deemed to be compensable.
42-1-415 provides some relief for the upstream contractor with coverage if the lower tier contractor provided a valid certificate of insurance at the time the contractor or subcontractor was engaged to perform work. In that event, the upstream contractor with coverage is entitled to petition the Commission to transfer responsibility to the Uninsured Employer’s Fund.
42-1-415 states that to qualify for reimbursement, the higher tier contractor must collect “documentation of insurance” or a certificate of insurance at the time the contractor or subcontractor is engaged to perform the work. Failure to secure the COI can and will result in a denial of reimbursement from the UEF. 42-1-415 also states that a knowing and willful failure to notify, by certified mail, the higher tier contractor who originally was provided the COI of a lapse in coverage within 5 days after the lapse is considered fraud.
A typical situation would involve a general contractor with coverage who requires all of his subs to provide COI’s showing coverage. There is no duty on behalf of the general contractor to contact the entity who issued the COI to verify that coverage is still valid nor is there any duty imposed on the general contractor to look at the policy to see who is actually covered. The construction business is a busy one and it would be an onerous burden to require general contractors to take another step and verify the COI. There are, however, frequent instances of policies being canceled for nonpayment after presentation to the higher tiered contractor without the 5 day notice specified by the statute.
The South Carolina Supreme Court has held that a subcontractor is engaged to perform the work is defined as, for purposes of reimbursement from the UEF, each time a subcontractor is actually hired to do a job. Hardee v McDowell, 673 SE2d 813, 2009. It is generally good practice for a higher tiered contractor to obtain a valid COI from every subcontractor hired for a job before the work starts. First of all, this protects the higher tiered contractor because it ensures that a lower tiered subcontractor will be held responsible for workers compensation claims involving either actual or statutory employees. It also provides the contractor in the event that the lower sub’s coverage later becomes invalid for some reason because it allows the contractor to transfer responsibility to the UEF as discussed above.
The issue of statutory employment is a multi faceted one, well beyond the scope of today’s blog. Please feel free to contact any of us if any issues concerning statutory employment or any other workers compensation matters arise.