Refining Workers’ Comp

In 1989 the Legislature jettisoned the generations-old Texas hybrid system and substituted a new workers’ comp system.

In the mid-19th century it dawned on European social designers that the cost of goods sold should be the total amount it takes to pay for work-related injuries and work-generated disabilities. They thought that such payments should not be delayed or uncertain. On the other hand, to be politically acceptable and insurable, such costs need to be both low and predictable.

Germany was the first to adopt a system like this one, doing so around 1875. Thereafter, other European countries followed suit.

Some American history
In general, lawmakers in the United States were skeptical of these trends. For one thing, the European system meant that negligent workers would be paid for injuries they inflicted upon themselves. Second, it meant that blameless workers would probably not be compensated for the entirety of their injuries. This was especially true if workers’ comp was reduced to a mechanical, Kafkaesque administrative system, as in central Europe. Besides, wasn’t everybody involved entitled to a jury trial if the facts were in dispute? Isn’t that the American way?

Texas adopted bits and pieces of the social insurance approach to workers’ compensation. For much of the 20th century, it was impossible for Texas employers to defeat employee claims simply because the employee negligently caused his own injury. Moreover, entitlements were formulaic and relatively swift.

The right to a jury trial remained, however, as did the right to manipulate venue. (If a worker or an employer was unhappy with the administrative award, he could obtain a trial de novo with a jury. In other words, courts reviewed decisions of administrators not merely for an abuse of discretion. Bureaucratic decisions were cancelled out, and the parties started from scratch in the court system. Obviously, this system could not prevent delays. Indeed, it created them.)

Over the years, the old system got extremely expensive. It restricted the contingent take of plaintiffs’ lawyers to 25 percent, but many thought even this too much. Consequently, in 1989 the legislature jettisoned the generations-old Texas hybrid system and substituted a new system that was significantly more administrative and from which the right to a jury trial was entirely eliminated. Lawyers for workers were also largely eliminated because their entitlement to contingency fees were drastically limited by statute. Predictably, the number of workers’ comp cases in the courts—both trial and appellate—dropped precipitously.

Part of the motivation of the legislature in restructuring the comp system was keeping down costs. To some degree, this effort has failed. As a consequence, many businesses and industries that subscribed to the comp system looked for ways around it. Some insurance intermediaries went into the business of designing insurance-like methods for avoiding the comp system. Two of these have been important in recent years. Both have been the source of trouble and litigation. Both have led to serious trouble for some insurance intermediaries—trouble that is far from over.

Employee leasing
One problem has to do with employee leasing. An employer can avoid having to become a subscriber to the workers’ comp system if it doesn’t have any employees. Thus, some clever entrepreneurs have designed systems whereby firms in relatively injury-prone businesses can avoid workers’ comp costs by having few workers in dangerous occupations. A business leases its employees, as it were, from another company who has lots of employees and nothing for them to do, except get leased to other businesses.

In its most extreme and reprehensible form, this scheme works this way. A real construction business (that say, digs trenches) has some accidents (say, some trench cave-ins). The injury-and-payment rating system reclassifies that business and makes its comp policy much more expensive. The business then gets rid of all of its employees, by transferring them to a brand new employee leasing company. Since the leasing company is new, it has no experience rating, so the price of its policy is relatively low. As the leasing company employees participate in a dangerous business, its experience rating changes and the price of the insurance goes up. That employee leasing company goes out of business, and another one is created. It starts with a low rating. And so on down the chain.

Of course, a system like this one is fraudulent in spirit if not out-and-out crooked. The administrative system and the legislature quickly realized what was going on, and both have taken steps to put a stop to this maneuver. Of course, few employee leasing schemes are as blatant as the one just outlined. In the end, however, they often boil down to something like it. Often, these schemes are compounded and/or unwittingly aided by administrative error. Honest insurance agents and brokers have long known to be careful of these schemes, and courts are not sympathetic towards them.

Employee negligence
As indicated, some intermediaries have sold businesses on not subscribing to the comp system. Sometimes, these arrangements can be cheaper than comp insurance. Sometimes, people try to sell this idea in the same way they sell self-insurance. The idea is that large companies, with plenty of reserves, should over time do just as well self-insuring as they do purchasing insurance. That proposition may be true sometimes, but its truth does not extend to workers’ compensation arrangements. To say that it does, is not merely false but verges on scandalous.

The only way a nonsubscriber arrangement can actually be cheaper than comp is if the company is substantially safer while it is a nonsubscriber than while it is a subscriber. In theory, if a company is primarily responsible for its own tort losses, legal fees, and so forth, it will be more attentive to issues of industrial safety. These issues are not simply a matter of rational economic choice, however. They also depend upon organizational cultures. Businesses do not transform themselves from unsafe to safe places overnight simply by making high-level financial decisions.

In any case, the complexities of various ways to pay for worker injuries have created a temptation for some brokers. For generations, if a business did not subscribe to the workers’ compensation system, it was statutorily precluded from asserting certain common-law defenses in their employees’ personal-injury actions against them. In particular, the employer could not assert contributory negligence as a bar to recovery.

One problem arose, however. Contributory negligence as a total bar to recovery was abolished statutorily several years ago. In its place, the legislature substituted comparative concepts in the general law of negligence. Under this system, a person could be negligent to some degree, and still have a partial recovery from another tortfeasor. Partial recoveries were possible so long as the plaintiff’s comparative responsibility for his own injuries did not exceed 50 percent. The legislature failed, however, to eliminate the phrase contributory negligence from the section of the Texas Labor Code which governed workers’ compensation.

This oversight created a temptation. It was possible for someone selling a nonsubscriber program to assert that, while a worker’s contributory negligence could not be asserted as a complete bar to recovery, nonetheless comparative negligence (fault, responsibility) could still be asserted as a partial bar to complete recovery against his employer. After all, the Labor Code explicitly excludes contributory negligence, assumption of the risk, and other-employee-negligence, as defenses, but it says nothing about comparative anything, and it is comparativity that is statutorily endemic to the tort system.

Of course, workers are frequently negligent in causing their own injuries, at least to some degree. Consequently, it was possible for those selling nonsubscriber schemes to say the Texas courts might—and to imply that they probably would—permit partial defenses to nonsubscribers based upon the workers’ comparative responsibility. It was also possible to say that, if so and the worker’s comparative responsibility exceeded 50 percent, then the worker could not get any recovery from them at all. These entrepreneurial intermediaries would then invite companies to take what the intermediaries represented or implied were reasonable risks.

There has been some confusion about this gambit in the courts. However, last year the Texas Supreme Court put the matter completely to rest in the Kroger Company v. Keng. The decision was unanimous. The phrase comparative negligence as used in the Labor Code is broad—even ambiguous—enough to cover the phrases comparative responsibility or comparative fault as used in the rest of tort law. Consequently, employers cannot use the comparative negligence of an employee to bar recovery.

In effect, the court said that in order to measure the comparative fault of the parties involved, someone would have to make a preliminary finding that the worker was negligent to some degree in causing his own injuries and that his negligence contributed to those injuries. This, said the court, was contributory negligence, and therefore fell within the preclusion of the Labor Code.

Kroger is not only correct but completely predictable. The workers’ compensation act is construed broadly in favor of workers, and its purposes should not be defeated by hair-splitting arguments. No one with any sense of social history should have expected anything else. Thus, anyone who sold nonsubscriber programs based upon the proposition that comparative responsibility or comparative fault would be permitted as a defense to nonsubscribers was surely guilty of culpable misrepresentations, whether or not such misrepresentations are legally actionable. Any lawyers who issued opinions telling brokers it was okay to say this sort of thing should be horsewhipped.

Multiple capacities
Nonetheless, not every broad interpretation of the comp act favors workers, especially when comp coverage exists and the employee is attempting to find a way to sue his or her employer. This principle is illustrated by Payne v. Galen Hospital Corp., decided by the Supreme Court of Texas on Aug. 24, 2000. In that case, Payne injured her back while working as a nurse. She obtained a prescription and filled it at the hospital pharmacy, “which provides medication only to hospital patients and employees who suffer on-the-job injuries.” Unfortunately, Payne suffered a reaction to the medication prescribed which was both severe and permanently disabling. “She suffered vasculitis, breathing problems, cataracts, peripheral-nerve damage, joint damage, and severe depression. She [became] totally and permanently disabled and will be confined to a wheelchair for the rest of her life.”

Payne sued the doctor, the drug manufacturer, and the hospital (her employer). Payne received comp benefits but sought tort damages from the hospital because of the pharmacist’s negligence in filling the prescription. Usually, of course, workers who elect comp benefits cannot also sue employers for tort damages. This is called “the comp bar.”

The doctor and the drug manufacturer settled with Payne. The hospital set up the comp bar as a defense and moved for summary judgment. The trial court granted the hospital’s motion; the court of appeals originally reversed the summary judgment; but on rehearing, it reversed itself and affirmed the trial court, one judge dissenting.

The issue before the Supreme Court was whether Payne’s reaction to the drug was work-related—whether it had originated in her work—or whether the filling of the prescription was a new a different activity unrelated to the employer-employee relationship. Payne argued that her reaction to the drug was an independent injury and did not occur in the course and scope of her employment. Hence, she argued that she was not restricted to the exclusive-remedy provisions of the Texas Labor Code, since those provisions apply only to work-related injuries.

The court rejected Payne’s argument. It said that the concept of course-and-scope-of-employment should be understood broadly. Since Payne could fill prescriptions at hospital pharmacy without charge and since the hospital pharmacy was open only to hospital patients and hospital employees filling prescriptions for on the job injuries, Payne’s adverse reaction to the drug prescribed was nothing but an aggravation of an on-the-job injury and was hence work-related, for the purposes of the comp bar.

Understood narrowly, the Payne decision may be correct. After all, her access to the drugs at that pharmacy was a result of the employer-employee relationship. One wonders what the court would have done if the employer had simply owned a pharmacy from which anyone could buy drugs, and an employee bought drugs at that pharmacy for a work-related injury, and the pharmacy negligently filled the prescription. In musings, Justice Harriet O’Neill observed that the majority of states would still assert the comp bar and restrict the worker-victim to workers’ comp remedies. The Texas Supreme Court has long held that Texas insurance law should, if at all possible, follow whatever rule is adopted by substantial majority of other jurisdictions.

What are the lessons for workers here? They should not accept medical services from their employers. Instead, they should get their own doctors and their own pharmacies. What is the lesson for employers? Exactly the opposite.

Cases before the court
In general, the workers’ comp issues that now come up before Texas courts are quite technical. They involve such fascinating matters as whether a worker employed in Texas but dispatched to Louisiana to work on a project is governed by Texas or Louisiana law. These are problems only lawyers can love, and most of them don’t.

Workers’ comp cases seldom spill over into the courts. They can, though. Workers’ comp insurers are subject to common law bad faith, and if an insurer does a terrible job of adjusting a comp claim, it may find itself facing serious damages. Then again, the case that extended common law bad faith to comp claims was decided on a 5-4 basis, and several members of the current Supreme Court have hinted that they are dissatisfied with this result. Interestingly, the court may have an opportunity to rethink this matter later on in the year.

Topics Texas Workers' Compensation Europe