WHO'S THE BOSS? AFFILIATED ENTITIES OBSCURE IDENTITY OF TRUE EMPLOYER

June 16, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

Affiliated corporations can obscure the identity of an injured worker's employer. And a light fog can turn into a dense cloud of confusion as lawyers handle separate workers' compensation and tort claims against related firms without carefully unraveling the separate identities of the employer and potential third-party defendant.

A particularly vexing example of this common situation is a case involving two affiliated firms called National Restoration and National Resurfacing. Gray v. National Restoration Systems Inc., 2004 WL 834724 (1st Dist., April 16).

As Justice Ellis E. Reid recounted, William Gray died in an accident while working on a restoration project at a Days Inn Hotel in Chicago. And there was conflicting evidence about whether Gray was employed by National Restoration or National Resurfacing when he was killed.

Thomas Reagan, the president of National Restoration, testified he was in charge of overseeing the Days Inn project and that Gray was an employee of National Restoration at the time of the accident. Yet Thomas Reagan's father -- Frank Reagan, a co-owner of both corporations -- testified that he and his son operated both firms as a single entity, and that William was an employee of National Resurfacing when he died. And a W-2 form supported Frank Reagan's testimony that William was an employee of National Resurfacing.

This basic uncertainty about the key fact of which corporation employed William rippled through the administrative and judicial proceedings, culminating in a split opinion on appeal.

Valerie Gray started by filing a workers' compensation claim that named "National Resurfacing Inc., d/b/a National Restoration Systems." Then she launched a lawsuit against "National Restoration Systems Inc., f/k/a National Resurfacing Inc."

So the workers' compensation claim was premised on the belief that National Resurfacing did business under the name National Restoration. But the common- law complaint was initially based on the notion that National Restoration was once called National Resurfacing. And neither claim seemed to recognize that National Restoration and National Resurfacing are separate corporations.

Increasing the confusion, defense counsel in the negligence case filed a motion to dismiss on behalf of an entity identified as "National Restoration Systems Inc., f/k/a National Resurfacing Inc."

This motion asserted that the negligence case was barred by the exclusive- remedy provision of the Workers' Compensation Act.

A Cook County judge denied the motion to dismiss without prejudice, cautioning that the negligence case would be tossed out if the widow obtained benefits from National Restoration in the workers' compensation case.

Making an effort to clean up the confusion, an amended complaint was filed against "National Restoration Systems Inc., an Illinois corporation." But the same initial confusion resurfaced a few weeks later when the Industrial Commission approved a settlement agreement that was labeled: "Valerie Gray, widow of William Gray, deceased v. National Restoration Systems Inc., a/k/a National Resurfacing Inc."

This contract stated that "William Gray's employer, National Restoration Inc." would pay $220,000 to settle the compensation case.

Back in the negligence case, defense counsel filed another motion to dismiss, based on section 5(a) of the Workers' Compensation Act, on behalf of "National Restoration Systems Inc., f/k/a National Resurfacing Inc."

The motion judge, concluding that National Restoration was William Gray's employer, dismissed the negligence claim with prejudice.
Splitting 2-1, the Appellate Court reversed, guided by the Illinois Supreme Court's analysis in Laffoon v. Bell & Zoller Coal Co., 65 Ill.2d 437 (1976).

Here are some highlights of Reid's majority opinion and Justice Calvin C. Campbell's dissent (both with various omissions not noted in the quoted text):

"We find Laffoon to be instructive in regards to this matter," Reid wrote for the majority. "In Laffoon, the plaintiffs were the immediate employees of subcontractors that did not provide workers' compensation insurance. Each of the plaintiffs suffered an injury while working on their respective jobs. Consequently, the general contractors in each case were forced to pay the injured plaintiff's workers' compensation claims.

"The question that the Laffoon court was faced with was whether section 5(a) of the act provided the general contractors with immunity from further litigation by the plaintiffs, since they payed the plaintiffs' worker's compensation claims.

"The Laffoon court held: 'Accordingly, we must interpret section 5(a) as conferring immunity upon employers only from common-law or statutory actions for damages by their immediate employees. To hold otherwise in light of the present factual situations would be violative of the injured employee's right to due process and equal protection of the laws.' "

"Taking Laffoon into consideration," Reid explained, "if National Resurfacing were the decedent's employer at the time of the accident, Gray would have the right to pursue a common-law suit against National Restoration. Although National Restoration paid the workers' compensation claim, if National Restoration were not the decedent's immediate employer, section 5(a) of the act would not provide National Restoration with immunity from further litigation.

"Accordingly, the question of who was the decedent's employer at the time of the accident becomes a question of paramount importance in this litigation.

"Here, the trial court's decision to grant National Restoration's motion to dismiss was error because a question of fact exists as to whether the decedent was an employee of either National Restoration or National Resurfacing.

"Deposition testimony revealed that T. Reagan, the president of National Restoration, stated that the decedent was an employee of National Restoration at the time of the accident. However, in another deposition, F. Reagan, an owner of both National Restoration and National Resurfacing, stated that the decedent was an employee of National Resurfacing at the time of the accident.

"These statements clearly present an issue of fact as to who was the decedent's employer at the time of his death. As such, it was improper for the trial court to grant National Restoration's motion to dismiss.

"In response, National Restoration argues that the settlement agreement which Gray signed prevents her from pursuing further relief from National Restoration. We disagree. After reviewing the record, we find that the settlement agreement which Gray signed only settled the workers' compensation suit and nothing more. The settlement did not and cannot prevent her from pursuing further relief that she is entitled to pursue under the act."

Based on this analysis, the majority decided that the negligence claim was not barred by judicial estoppel or res judicata.

"Here," Reid continued, "Gray is not judicially estopped from maintaining this cause of action against National Restoration because it is allowed by the provisions of the act. Here, under the act, National Restoration was liable to Gray for the injuries that the decedent incurred regardless of the stance that Gray took in those proceedings.

"Furthermore, if it is determined in the trial court on remand that National Resurfacing was the decedent's employer at the time the accident, the act also allows Gray to then file suit against National Restoration for common-law negligence. This is allowed under the act as interpreted by Laffoon, and Gray's rights cannot be abridged by the application of the doctrine of judicial estoppel in this instance."

Finally, Reid wrote, "The doctrine of res judicata does not bar Gray from further pursuing a suit against National Restoration, if it is determined that National Restoration was not the decedent's employer at the time of the accident. Although National Restoration paid the settlement in Gray's workers' compensation suit, that does not bar Gray from bringing a common-law suit. This right of action is allowed under Laffoon, and the doctrine of res judicata cannot prevent Gray from herein asserting her rights."

The dissent, however, took a different reading of the case law.

"Laffoon is inapposite," Campbell's dissent concluded.

"There, the plaintiffs in three consolidated appeals were employees of subcontractors and were injured while working on sites controlled by general contractors who were separate entities from their subcontractor-employers. In all three situations, the plaintiffs' subcontractor-employers carried no compensation insurance, and the plaintiffs recovered workers' compensation benefits from the general contractors.

"Subsequently, the three plaintiffs filed complaints against the three general contractors alleging violations of the Structural Work Act, and their complaints were dismissed pursuant to section 5(a) of the Workers' Compensation Act, which provided immunity from an action for damages by an employee of an uninsured subcontractor after being required to pay compensation benefits to that employee under section 1(a)(3) of the act.

"On appeal, the Illinois Supreme Court compared the facts of the three cases to the following hypothetical situation:

" 'Two men are working on a beam which suddenly collapses injuring both men. The first man is an employee of a subcontractor who has workmen's compensation insurance. This man will receive compensation benefits from his employer and may subsequently sue the general contractor -- or the person "engaging in any business or enterprise referred to in subsections 1 and 2 of section 3 of [the Workers' Compensation] Act" (hereinafter included under the term general contractor) -- who, he maintains, is tortiously liable for his injuries.

" 'The second man is an employee of a subcontractor who carries no compensation insurance and has not "guaranteed his liability to pay such compensation." Under section 1(a)(3) of the act, this man will receive compensation benefits from the general contractor. He will be precluded, however, under defendants' interpretation of section 5(a) from maintaining a suit for damages against the general contractor even though he is liable for the employee's injuries. Moreover, the general contractor who pays benefits to the injured employee is permitted by section 1(a)(3) to recover from the subcontractor the amount paid, and thus may suffer no monetary loss. Plaintiffs contend that a construction of section 5(a) which allows the result illustrated creates an arbitrary and impermissible classification among injured employees.'

"The court reversed," Campbell recounted, "finding that a construction of section 5(a) of the act which provided general contractors with immunity from actions for damages by injured employees of a subcontractor who carries no compensation insurance would result in an arbitrary classification.

"The facts of the present case are wholly distinguishable from those in Laffoon. Here, the record shows National Restoration Systems Inc. was a subcontractor on the Days Inn project. Plaintiff here does not and cannot claim that National Restoration Systems Inc. either failed to carry compensation insurance or that National Restoration Systems Inc. was a general contractor who may be liable in a subsequent action under the Structural Work Act.

"National Restoration Systems Inc., in fact, carried compensation insurance and paid compensation to the plaintiff in the amount of $200,000. While plaintiff has failed to allege that National Resurfacing Inc. was uninsured, Thomas Reagan stated that both National entities were insured on the same policy of insurance by American States."

Campbell concluded that Valerie Gray entered into a binding settlement agreement with National Restoration and that her negligence claim against National Restoration was barred by both judicial estoppel and res judicata.

After reading, rereading and re-rereading the frustrating chronicle of confusion in the National Restoration-National Resurfacing fiasco, I'm inclined to think judges should slap affiliated corporations with the burden of cleaning up this kind of worthless mess by pleading and proving, at the start of a case, which of various related companies was the employer of an injured plaintiff.

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