Worker’s Comp Coverage Would Have Been A Good Thing for This Employer

The Michigan Court of Appeals publishes very few decisions, and even fewer involving employment issues. So, you really have to take notice when it does. 

Drob v SEK 15, Inc (d/b/a Knapps Tavern) is that rare appellate case involving the Worker’s Disability Compensation Act (WDCA) and whether the plaintiff was an employee or independent contractor when she was working on premises.

There was a time, long ago, in a not too distant century, when employees who became injured at work  through no fault of their own had to sue their employers to receive compensation for their injuries. That was an untenable situation that could take years, leaving families without the income they needed and employers facing potentially large verdicts, huge legal bills and, at times, bankruptcy.  But then, in 1969, a wise and compassionate Legislature in Michigan took pity on both and passed the WDCA.

The WDCA is intended as a compromise. Both employees and employers get a little and give a little. Employees have the peace of mind knowing that, generally, if they suffer an injury or illness that arises out of or is incurred in the course of their employment, they will receive medical care and some income replacement.

Employers know that, generally, if they pay their premiums, they cannot be sued in court for damages which could include compensation for pain and suffering. This is known as the exclusive remedy bar. Pain and suffering damages are particularly worrisome because, after all, how much would you want if you suffered disfiguring and painful third degree burns over 60% of your body?

There is an exception to the exclusive remedy bar for intentional torts (where the “employee is injured as a result of a deliberate act of the employer and the employer specifically intended an injury;” for example, “the employer had actual knowledge that an injury was certain to occur and willfully disregarded that knowledge”). But those claims are difficult to prove and rarely brought.

With this background, let’s dive into our case.  Jennifer Drob tended bar at Knapps Tavern in Richmond, Michigan. While working in December 2017, Drob injured her ankle on an uneven drain cover, requiring her to undergo surgery. 

Drob asked the owner to submit a claim for “worker’s comp” or under the general liability insurance. However, Drob, who worked part-time “under the table” was told she didn’t qualify for worker’s disability compensation benefits, because she wasn’t an employee and the owner failed to investigate coverage under the other insurance policy. 

It doesn’t take a psychic to know what happened next. Drob ended her employment and sued.

In her lawsuit, Drob claimed she was a “business invitee” who got hurt while working for the tavern. This is a premises liability claim. She also claimed that Knapps Tavern violated the WDCA by failing to cover all of its employees as required.  Of course, she wanted pain and suffering damages along with her lost wages and medical expenses.

Knapps responded with a motion to dismiss, asserting the exclusive remedy bar under the WDCA. The defense motion argued that a claim “had been made on Drob’s behalf with its insurer… [but the court noted] however, that Eleanor Knapp later denied making such a claim in her deposition. And most of the boxes on the claim form provided to the court were left blank.”

Drob argued against dismissal because discovery had just begun and “there remained questions of fact whether she fell within the definition of an ‘employee’ under the [WDCA] or an independent contractor, who could file a tort action.” The trial court denied the motion without prejudice, allowing the case to continue.

During her deposition, Drob described her relationship with the tavern as informal. She had worked there since 2000, initially helping a friend of hers who managed the tavern when it was short staffed. She was paid $5 per hour bartending and doing whatever else needed to be done. Drob maintained another full-time job and held herself out in the community as a bartender for other places and special events. Drob also testified that when she asked about a “worker’s comp” claim, she was told she was not an employee and not eligible.

Knapp testified that Drob never asked for a worker’s comp claim and therefore, she never filed one. Huh? I thought the claim form was given to the court. Oh, sorry I digress. First lesson: don’t submit a form to the court that you will later testify was never created.

Drob also argued in her own motion that, unlike others who worked at the tavern, she was paid under the table, worked other jobs and was an independent contractor. In fact, Drob argued that Knapp “flat out”  told her “she was not an employee.” Second lesson: never pay someone “under the table”  because it is penny wise and pound foolish, and quite frankly, a bad idea, perhaps even unlawful depending on the amount paid.

The parties disagreed about the proper test to be applied in determining whether a worker is an employee or independent contractor: the 20-factor test (argued by Drob) or the original three-part test (argued by the tavern). Don’t chuckle, but the trial court decided not to decide and analyzed the relationship under both tests. It determined that Drob had been an independent contractor and was not subject to the exclusive remedy bar. Knapps Tavern appealed.

Let’s cut the court some slack. The reason it seemed to hedge on the proper test is because that issue had not been decided by any Michigan appellate court. That is also the reason we have the published opinion. Thankfully, the Michigan Court of Appeals chose the three-part test, or this  post would be much longer. The appellate court stated:

To be an employee subject to the exclusive remedy provision of the WDCA, the court must find that a person (1) ‘does not maintain a separate business,’ (2) ‘does not hold himself or herself out to and render service to the public,’ and (3) ‘is not an employer subject to this act.’

But as noted by the [Michigan] Supreme Court … there is one prerequisite to our consideration … we must determine whether Drob was an employee under MCL 418.161(1)(l)…[which] defines an ‘employee,’ in relevant part, as a person ‘in the service of another, under any contract of hire, express or implied.’

Okay, I am confused.  Isn’t the three-part test used to determine this? The appellate court continued:

[Drob] did, however, serve defendant under an implied contract of hire. ‘A contract implied in fact arises when services are performed by one who at the time expects compensation from another who expected at the time to pay therefor. Drob had performed services for defendant for approximately 17 years, and she expected regular compensation from defendant. Indeed, defendant understood its duty to compensate Drob at an hourly rate for her work.

Slip op, p 6 (citation omitted). So, if Drob had an implied contract, doesn’t she lose because she is an employee? Wrong. What a tease! The appellate court noted that subsection (n) also requires a court to determine whether the service held out to the public was the same or different service. In this case,  it was the same: bartending. “By word of mouth, Drob advertised her services to other establishments or for special events as a bartender.  Accordingly, Drob was an independent contractor, not an employee for purposes of the [WC] Act.”

What a cliff hanger. Because Drob held herself out to the public for the same services, she was an independent contractor (not an employee) and able to continue to seek pain and suffering in a premise’s liability action against Knapps Tavern.

Before you memorize this test and use it to determine how to classify your workers, remember, there are different tests used under wages laws, etc. That’s what keeps attorneys employed. Thus, our story has a happy ending after all.

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