The Exclusive Remedy Rule or, How I Learned to Stop Worrying and Love Workers' Compensation
November 18, 2020
By: Vedang J. Patel and Joshua W. Praw
California's Workers' Compensation Act, and any other state that adopts such a rule, subjects employers to strict liability for injuries sustained by employees while in the course and scope of employment, whether inflicted by the employer, a co-employee, or by the employee themselves. The Act also makes workers’ compensation benefits the employee’s sole and exclusive remedy against the employer – the so-called Exclusive Remedy Rule. 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. The Exclusive Remedy Rule as it pertains to parent-subsidiary entities is an entire body of law that will not be addressed in this article.
In many instances, however, a third-party is exclusively or concurrently at fault for an injured employee’s work-related injuries. The limitation on employer’s liability does not extend to third parties, however, and the employee may sue a third party for damages caused by its negligence. But, what happens if the third party tortfeasor cross-complains against the employer for defense and indemnity? Does the Exclusive Remedy Rule protect the employer from this cross-complaint?
This article addresses the question under California law: to what extent is an employer liable to a third party tortfeasor on cross-complaint for injuries to an employee?
II. THIRD PARTY ACTIONS
A third party to a lawsuit may attempt to file a cross-complaint against the employer of an injured employee. At first, it may proceed, but there are mechanisms for the employer to eventually get out of the cross-complaint. Alternatively, the third party may also assert an affirmative defense in its answer to the worker's complaint, asserting comparative liability on the part of the employer.
If the third party does file a cross-complaint against the employer, then the employer must answer and will be brought into the lawsuit. The Exclusive Remedy Rule will not work on demurrer, but will work on Motion for Summary Judgment. Lawsuits can be very expensive and thus is an undesirable outcome for any employer, who should not be in the lawsuit to begin with. The employer will have to engage in discovery including written discovery and depositions. This requires money and time and only takes away from the business’s true purposes.
If the third party does not bring a cross-complaint against the employer, they may still assert affirmative defenses in their answer to a worker’s complaint. The third party may argue the worker's injuries were due to someone else's negligence, such as the employer. However, it is the third party's burden of proof and the third party must prove that the worker’s injury was a result of the employer’s actions and not its own.
III. HOW TO PROTECT YOUR CLIENT FROM THIRD PARTY CROSS-COMPLAINTS
The bar against third party tortfeasor cross-complaints is codified in Labor Code § 3864, and interpreted by a number of California Appellate and Federal Courts. There are however two notable exceptions: (1) express defense and indemnity agreements between the employer and the third party tortfeasor; or (2) if the employer has made a claim for reimbursement of its workers' compensation costs against the third party tortfeasor, then a cross-complaint may be brought for implied or express defense and indemnity. There are other minor exceptions too, such as an employer acting outside the scope of employment by committing fraud, not possessing valid workers' compensation insurance, however those exceptions are not discussed here.
It invariably occurs that third party tortfeasors bring cross-complaints for defense and indemnity against our clients, as discussed above in Section II. This frequently occurs in the entertainment and construction industries. There are a number of things to keep in mind to protect your client's interest and get them out from under the cross-complaint for implied indemnity.
First, ensure there is no written contract clause between your client and the third party tortfeasor creating express defense and indemnity rights. Such a clause supersedes Section 3864 and therefore allows a cross-complaint by a third party for express indemnity.
Second, make sure your client has valid workers' compensation insurance. If the employer fails to carry workers' compensation insurance, then the Exclusive Remedy Rule does not apply and the injured employee and any other third party tortfeasors may sue your client.
Third, make sure neither your client nor its workers' compensation carrier makes a claim for reimbursement of its workers' compensation costs. This could be in the form of a lien, a Complaint-In-Intervention, or even a written demand for reimbursement. This opens the door for the third party tortfeasor to cross-complaint against your client for defense and indemnity.
If your client has valid workers' compensation insurance, has not made any claims for reimbursement of workers' compensation costs, and does not have an express defense and indemnity agreement with the third party tortfeasor, but the third party tortfeasor brings a cross-complaint for implied defense and indemnity anyways, your client has a few options.
The first, easiest, and most cost effective option is to meet and confer. Outline Labor Code § 3864's bar against employer's third party liability under equitable indemnity theories. You should also point opposing counsel to California Appellate Court cases C.J.L. Construction, Inc. v. Universal Plumbing, Difko Admin. v. Sup. Ct., and State of Cal. v. Sup. Ct. (Glovsky), and the Federal case Hall v. North American Indus. Services, Inc.
If this is not enough to persuade your hard headed opposing counsel to dismiss of the cross-complaint, unfortunately, your client's next best option is a Motion for Summary Judgment. The cases cited above provide the perfect template for your Motion for Summary Judgment, as those cases affirm granting of Motions for Summary Judgment on this exact issue.
However, one method that might work for you, which saves time and money compared to a Motion for Summary Judgment, is to settle for a nominal amount with Plaintiff pending court approval of a Motion for Determination of Good Faith Settlement. The grounds for the Motion for Determination of Good Faith Settlement are straightforward and obvious: our client would win a Motion for Summary Judgment anyways, making the nominal settlement with plaintiff in good faith. Once the Motion is granted, your client is effectively dismissed with prejudice, including from the third party tortfeasor's cross-complaint. You are now out of the case without having to file a Motion for Summary Judgment. If the Motion for Determination of Good Faith Settlement is denied, then your client is not obligated to pay the nominal settlement to Plaintiff, and you bring the Motion for Summary Judgment against the cross-complaint.
IV. AB 5
On January 1, 2020, California Assembly Bill 5 (“AB 5”) went into effect for all employers. It requires a stricter standard for classifying workers as either employees or independent contractors. If a worker is classified as an employee, then the employer must obtain workers' compensation insurance for its employees and is entitled to the benefits that the Exclusive Remedy Rule provides. However, if a worker is classified as an independent contractor, the employer is not entitled to the protection the Rule gives. Thus, an independent contractor who is injured on the job may file suit against both the “employer” who obtained the independent contractor’s services and any third parties. This means a third party may also file a cross-complaint against your client if a worker is designated as an independent contractor. Note that there are numerous industries which are not under the stricter test for employee status including, insurance agents, physicians, attorneys, direct salespersons, and others.
The law is clear that a third party may not assert a cross-complaint for implied indemnity against an employer of an injury employee. However, this rule does not prevent a third party from filing a cross-action against an employer. This rule serves to protect employers who obtain workers' compensation insurance from complete liability in civil court. Only an express agreement between an employer and a third party allowing for indemnification may allow for a cross-complaint by the third party against an employer. Further, employers may want to re-consider classifying their employees as independent contractors after AB 5. While AB 5 has made it more difficult to classify workers as independent contractors, it also allows business to receive the protection of the Exclusive Remedy Rule against third parties.