July 29, 2013 Articles

Workers' Compensation Immunity for Companies with Separate Corporate Entities

By Michelle Molinaro Burke and Roy Alan Cohen

Corporate and tax attorneys often advise their clients to create separate business entities for manufacturing, distribution, property ownership, and leasing purposes. This advice often is given as a strategy for insulating certain entities from liability to those injured on premises or in the course of their employment. What works for tax or other purposes may not protect separate corporate entities that are not intertwined with the employer-employee relationship, which through their state's workers' compensation statute would protect against all civil tort liabilities arising from workplace injuries except those involving an "intentional wrong." See, e.g., N.J. Stat. Ann. § 34:15-8; see also Tomeo v. Thomas Whitesell Constr. Co., Inc., 176 N.J. 366, 377–78 (2003); Millison v. E.I. du Pont de Nemours & Co., 101 N.J. 161, 177 (1985); Kaczorowska v. Nat'l Envelope Corp., 342 N.J. Super. 580, 587 (App. Div. 2001). However, clients should be aware that their corporate organizational structure may put them at risk of civil liability for tort or occupational exposure-based injuries, even without proof of conduct that rises to an "intentional wrong."

Risk of Civil Tort Liability for Corporate Affiliates
In New Jersey and other jurisdictions, the law is clear that corporate affiliates of an employer are not entitled to workers' compensation immunity. See, e.g., Volb v. G.E. Capital Corp., 139 N.J. 110 (1995), Roy v. Bachmann, 994 A.2d. 676 (Conn. App. Ct. 2010). In Volb v. G.E. Capital Corp., the injured worker's widow obtained workers' compensation benefits through her husband's employer but also brought common-law tort claims against two subsidiaries that were wholly owned by the employer. 139 N.J. 110. The New Jersey Supreme Court agreed with the view adopted by the majority of jurisdictions and held that the workers' compensation immunity provided to employers does not extend to affiliated entities, parents, or subsidiaries. Id. at 122. The court reasoned as follows:

[W]e have no doubt that companies that elect for sound business considerations to operate their enterprise by using multiple affiliated companies anticipate the risk of intra-corporate tort liability and therefore purchase liability insurance to offset that risk. Presumably, the decision to operate through interlocking corporations reflects the pragmatic determination that the specific advantages derived from the multi-corporate enterprise outweigh the risk of tort liability that the form of enterprise entails. Neither legislative history, precedent, nor public policy suggests that this Court should second-guess the reasonableness of such a business decision.

Id. at 126.

As  a result, "'[t]hose incorporators or their successors, while entitled to the benefits that flow from incorporation, must also accept the burdens that flow from the use of the corporate structure. One of the burdens to be accepted is that a corporation may not share the immunity N.J.S.A. 34:15-8 provides to a sister subsidiary corporation.'" Id. at 125 (quoting Vernon v. Supermarket Servs. Corp., 250 N.J. Super. 8, 10 (App. Div. 1991)).

Along these same lines, workers' compensation immunity does not extend to corporate principals as courts are reluctant to pierce the corporate veil to protect them. See, e.g., Croxton v. Crowley Mar. Corp., 817 P.2d 460 (Alaska 1991); Lyon v. Barrett, 89 N.J. 294 (1982). For example, in Lyon v. Barrett, the plaintiff sustained injuries while working at a dental office organized as a professional corporation on property owned individually by the defendant, who was the sole principal of the corporation. 89 N.J. at 298; see also Radar v. Omni Fin. Servs., Inc., 2009 N.J. Super. Unpub. LEXIS 2723 at *16 (App. Div. Oct. 29, 2009). The plaintiff sought to hold the defendant landowner liable on a premises liability claim. The defendant landowner argued that the claims against him were barred by workers' compensation immunity because he and the corporation were a "unitary employer-entity." Id. In this scenario, the court refused to pierce the corporate veil to extend immunity to the landowner and found that the landowner could not escape tort liability.

A frequent factual setting in toxic tort cases involves a chemical manufacturer that operates its manufacturing facility on real property owned by a separate corporate entity. The manufacturer, or even a third entity, may employ the worker who has been injured through occupational exposure. In this scenario, the landowner entity must be aware that when a direct employee claims that he or she is injured as a result of occupational exposure or other dangerous condition on the property, the landowner likely cannot avail itself of the same immunity that its employer affiliate enjoys.

Moreover, the landowner entity must also be aware that its direct involvement in the business operation or safety program of the employer entity may subject it to potential independent or joint civil liability. To avoid this risk, there are a few steps that the affiliated entity should consider to enhance the argument that it is shielded from civil tort liability based on the affiliated entity's direct involvement.

Minimizing Risk under Direct Involvement Theories
First, the affiliate landowner entity can minimize the risk of "direct participant" liability for directing the subsidiary-employer in activities that could result in foreseeable harm. In some jurisdictions,

[w]here there is evidence sufficient to prove that a parent company mandated an overall business and budgetary strategy and carried that strategy out by its own specific direction or authorization, surpassing the control exercised as a normal incident of ownership in disregard for the interests of the subsidiary, that parent company could face liability.

Forsythe v. Clark USA, Inc., 224 Ill. 2d 274, 290 (2007) (emphasis in original).

As a result, an entity could be found liable for foreseeable injuries if it authorizes or directs a specific activity or when it "mandates an overall course of action and then authorizes the manner in which specific activities are undertaken." Id. Thus, "if parent companies do interfere directly in the manner their subsidiaries undertake certain activities, they must do so with reasonable care." Id. at 291.

Second, the affiliate landowner should consider the extent to which it voluntarily undertakes the obligation to provide a safe workplace to the operating entity's employees. In some jurisdictions, courts have taken the unusual step of imposing liability on the parent-landowner "for unsafe conditions at a subsidiary only if it assumes a duty to act by affirmatively undertaking to provide a safe work environment." Muniz v. Nat'l Can Corp., 737 F.2d 145, 148 (1st Cir. 1984). To determine whether such a duty exists, courts look "to the scope of the parent's involvement, the extent of the parent's authority, and the underlying intent of the parent to determine whether the parent corporation affirmatively undertook the duty [ordinarily] owed by the subsidiary." Bujol v. Entergy Servs., Inc., 922 So. 2d 1113, 1131 (La. 2004).

Liability in these circumstances is typically reserved for the rare case where the parent-landowner undertakes a safety obligation on behalf of or in place of the affiliated employer. Id. (internal citations omitted). For instance, this standard was met when the parent-landowner was found to have negligently designed and installed a ventilation system that caused the death of 15 miners at a subsidiary's mine. Id. at 1133 (internal citation omitted). By contrast, "neither a parent's concern with safety conditions and its general communications with the subsidiary regarding safety matters, nor its superior knowledge and expertise regarding safety issues, will create in the parent corporation a duty to guarantee a safe working environment for its subsidiary's employees." Id. at 1133. In addition, courts have declined to find that the parent-landowner made an "affirmative undertaking" when it hired the safety director who worked for the subsidiary, assisted the subsidiary in evaluating and inspecting the safety conditions at the subsidiary's plant, or conducted a negligent inspection. Id. at 1132 (internal citations omitted).

Third, the landowner entity should consider formally conveying the real property to the employer through a lease agreement. This lease could unequivocally delegate responsibility for maintenance and repair to the employer-tenant. In McBride v. Port Authority of New York and New Jersey, 295 N.J. Super. 521 (App. Div. 1996), the court examined the precise issue of whether an employee of a commercial tenant in exclusive possession of premises may hold the tenant's landlord liable for personal injuries suffered as a result of improper maintenance or repair where the lease delegated maintenance responsibilities to the employer. The court observed that "'historically, a lease was viewed as a sale of land and that as a result, the landlord was not responsible to maintain the leased premises.'" Id. at 525 (citing Michaels v. Brookchester, 26 N.J. 379, 382 (1958)). However, two exceptions to this rule were considered. These exceptions include the situation in which the landlord entity remains responsible to use reasonable care with regard to portions of the leased premises that remain in the landlord entity's control. In addition, the entity serving as landlord, although it has shifted its maintenance responsibilities, may still be subject to a covenant to repair that still obligates it to use reasonable care in performing any repairs or improvements. Id. at 525 (citing Michaels, 26 N.J. at 383–85). Keeping these obligations in mind, the court held that because the lease unambiguously placed responsibility for maintenance and repairs on the employer-tenant, the landlord could not be held liable for injuries to the tenant's employee that arose as a result of a defective condition on the premises. Id. at 526–27.

Fourth, the landowner entity could unequivocally relinquish any rights to and delegate responsibility for the design and construction of future improvements on the property to the employer-tenant. As noted, where preexisting improvements or repairs performed by the landowner are defective, the landowner entity may be subject to liability if a worker is injured as a result of a defective repair or construction. For instance, in Geringer v. Hartz Mountain Development Corp., 388 N.J. Super. 392, 402 (2006), cert. denied, 190 N.J. 254 (2007), the court found that the lease carefully defined the tenant-employer's role with respect to repairs and maintenance, and the landowner could not be subject to liability for injuries stemming from these obligations. However, because the employee claimed that he was injured in a stairway that was defectively designed and built by the landowner, not the employer, the court held that the employee plaintiff could maintain a negligence action against the landowner, given that the landowner in this instance was in the best position to exercise reasonable care.

The organization of corporate affiliates requires particular attention to detail and an understanding of how courts view corporate separateness and veil piercing to take full advantage of workers' compensation immunity. Creating separate corporate entities may not effectively protect clients from civil tort liability if they are not protected by workers' compensation immunity. A careful analysis of the range of potential risks of liability that a corporation faces will be critical in determining the appropriate corporate structure. Although the strategies outlined here are no guarantee, a more proactive and informed approach will help to minimize the potential liability risk.

Keywords: litigation, products liability, workers' compensation immunity, corporate affiliates, premises liability

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