“Trouble Ahead, Trouble Behind”

Does the Workers’ Compensation Exclusive Remedy Rule Protect Corporate Parents?

The Exclusive Remedy Rule provides that Workers’ Compensation is the only remedy for an injured employee against his or her employer, as long as the employer has obtained Workers’ Compensation insurance.

Businesses commonly operate through subsidiaries that are set up as separate legal entities, and frequently the corporate parent purchases insurance, including Workers’ Compensation coverage, for the entire organization under one policy. Under these circumstances, one might assume that the Exclusive Remedy Rule protects the corporate parent (and potentially other affiliates) from tort liability to an employee of a subsidiary who is injured on the job. However, there are cases that hold a parent company may be liable to its subsidiary’s injured employee, despite the Rule.

In California, a parent corporation may be liable if (1) there is an independent duty owed by the parent entity, and (2) there are “independent acts of negligence” by the parent that are separate from those of the subsidiary. For example, the Court allowed recovery against a parent corporation in a case where the subsidiary’s employee’s arm was amputated by a defective conveyer belt that had been designed and manufactured by the corporate parent. The Exclusive Remedy Rule did not bar the claim because the parent operated as a separate business entity, exercised no control over the employee, and the employee’s claim was based on the independent tort of products liability.

In a Kentucky case, the Court held a corporate parent was not exempt from liability for a mining disaster that killed several employees of a subsidiary. The Court relied on the rule that “separate corporate identities should not be disregarded,” and held under Kentucky's Workmen’s Compensation Act that “a parent is not immune from tort liability to its subsidiary employees for its own, independent acts of negligence.” The case was remanded for trial because the parent had primary responsibility for mine safety functions, engaged in independent misfeasance by authorizing the removal of ventilation and safety devices, and concealed those changes from the mine inspector.

The Illinois Supreme Court has found that the Exclusively Remedy Rule does not protect a corporate parent where was “direct participation” by the parent in the conduct that resulted in the subsidiary’s employee’s injury. The Court held that a parent entity may face liability if the parent mandates an overall business and budgetary strategy, and carries out that strategy by it its own specific direction and authorization, thus surpassing the control normally exercised over a subsidiary.

CONCLUSION

“Forewarned is forearmed.” The potential risk of corporate parent liability depends on the circumstances of each organization under the law of the jurisdiction where it operates, and should be considered as part of an organization’s ongoing risk management assessment. A corporate parent may protect itself by risk transfer, and should ensure that third party indemnity contracts and additional insurance endorsements are worded to afford protection for all entities within the organization, including “corporate parents, subsidiaries and affiliates.”