Section 9-508 of the Labor & Employment Article, also known as the “statutory employer provision,” extends workers’ compensation liability to principal contractors who would otherwise be immune under traditional common law analysis. Elms v. Renewal by Anderson, 439 Md. 381, 403 (2014) (“[T]he statute causes . . . the principal contractor to step into the shoes of . . . the subcontractor, for the purpose of providing compensation coverage to . . . the injured worker.”). Assuming the various statutory mandates are met, LE § 9-508 applies where a principal contractor agrees to complete work for a third party, but then sublets the job in whole or in part to someone else (i.e. a subcontractor). Id. at 397-98 (quoting Honaker v. W.C. & A.N. Miller Dev. Co., 278 Md. 453, 462 (1976)).
In effect, the statutory employer provision expands the definition of “employer” under the Maryland Workers’ Compensation Act. Elms, 439 Md. at 396 (quoting Rodrigues-Novo v. Recchi America, Inc., 381 Md. 49, 57 (2004) (“§ 9-508 broadens the definition of employer to cover principal contractors that ordinarily would not be considered the worker’s employer under the common law rules of ‘master’ and ‘servant.’”)). However, the statute does not supersede traditional analysis; “instead, it creates a potential alternative relationship [in situations] where the common law employer/employee relationship does not exist between the injured worker and the principal contractor.” Id. at 404.
The procedure for assessing principal contractor liability under LE § 9-508 is as follows:
1) Does the Claimant have a common law employment relationship with the principal contractor?
In Maryland, courts “look to the common law ‘master’ and ‘servant’ relationship to determine whether an individual is a ‘covered employee'” within the meaning of the Workers’ Compensation Act (“the Act”). Elms, 439 Md. at 393; see also Pro-Football, Inc. v. McCants, 428 Md. 270, 280 (2012) (“This is because the [Workers’ Compensation] Commission has jurisdiction to hear only those claims brought by a ‘covered employee'”). Accordingly, “the initial determination in any workers’ compensation case is whether the injured worker maintains a common law employer/employee relationship with an alleged employer.” Elms, 439 Md. at 404 (emphasis added).
In order for a master/servant relationship to exist, the employer must be “the one exercising control.” Elms, 439 Md. at 393. Factors to consider include who has the power to hire and fire, who is responsible for paying a worker’s wages, and who has “the power to control the employee’s conduct.” Id. In the contractor/subcontractor context, however, traditional common law analysis has the tendency of shielding principal contractors from workers’ compensation liability, because they generally exercise little to no control over the individual employees of a subcontractor. Hence the Act’s inclusion of the statutory employer provision, which aims “to obviate the use of subcontractors and sub subcontractors as a device for avoiding financially responsible workmen’s compensation coverage.” Id. at 401 (quoting Palumbo v. Nello L. Teer Co., 240 F. Supp. 226, 230 (D. Md. 1965)).
If a court finds that a master/servant relationship exists between a principal contractor and an employee then, for purposes of Maryland workers’ compensation benefits, the principal contractor is deemed to be the direct employer of the injured worker. Although a common law employer/employee relationship between a principal and subcontractor is rare, it is not impossible.
For example, in Elms v. Renewal, supra, the Court of Appeals of Maryland determined that a common law relationship existed between a principal and subcontractor—Renewal and Elms, respectively. The Court was persuaded by a number of factors that, in sum, revealed Renewal’s substantial control over the day to day conduct of Elms. Elms, 439 Md. at 395-96. The Court further held that LE § 9-508 is wholly inapplicable where such a common law employment relationship exists, because the injured worker constitutes the direct employee of the principal contractor. Id. at 403 (“This conclusion is logical because the employee is in a position to recover directly from his employer; thus, there is no need to establish a statutory employer/employee relationship.” (emphasis added)).
Therefore, when tasked with applying the statutory employer provision in any given case, it is prudent to first consider whether there is a common law employment relationship between the injured worker and the principal contractor. If in fact there is such a relationship, then there is no need to consider LE § 9-508, because the Claimant is already entitled to workers’ compensation benefits as a covered employee.
2) Is the Claimant a “covered employee” under the Act?
If a common law relationship does not exist between the injured worker and principal contractor, the next question is whether the Claimant constitutes a covered employee with respect to his direct employer, the subcontractor. “If the injured worker does not maintain a common law employer/employee relationship with the alleged employer, the inquiry is over, and the worker is not entitled to recover compensation benefits.” Elms, 439 Md. at 404. Again, “[t]his is because the [Workers’ Compensation] Commission has jurisdiction to hear only those claims brought by a ‘covered employee.'” Pro-Football, Inc. v. McCants, 428 Md. 270, 280 (2012) (emphasis added).
As described above, a covered employee exists where there is a master/servant relationship within the meaning of the common law. Further, it is also possible for corporate officers, partners, LLC members and sole proprietors to qualify as covered employees, provided certain statutory requirements are met. See, e.g., LE §§ 9-206, 9-219, 9-227. For example, in Palumbo v. Nello L. Teer Co., a partner in a partnership did not qualify as a covered employee because the Act mandates that partners “affirmatively elect to be covered” under a partnership’s workers’ compensation insurance policy. Because Palumbo failed to make such an election, he was not a covered employee, and thus “he could not recover workers’ compensation benefits from the principal contractor under LE § 9-508.” Elms, 439 Md. at 402 (internal citations omitted).
Standing in contrast to Palumbo is the case of Inner Harbor Warehouse, Inc. v. Myers, 321 Md. 363 (1990). There, a Claimant who was the president, sole stockholder, and CEO of his own corporation was deemed to be a covered employee “because corporate officers such as Myers are covered under the Act unless they chose not to be covered.” Elms, 439 Md. at 402 (internal citations omitted). Even though his corporation was in fact uninsured, Myers qualified as a covered employee within the meaning of Maryland’s Workers’ Compensation Act because he did not specifically exempt himself from coverage.
The Court of Appeals made reference to the decisions in Palumbo and Inner Harbor in Elms v. Renewal, supra, before concluding that the statutory employer provision did not apply to Elms, who himself was a sole proprietor. Similar to the rule governing partnerships, a sole proprietor is not a covered employee unless an express election is made in accordance with LE § 9-227(a). As was the case in Palumbo, Elms also failed to make such an election and was therefore not a covered employee of his business. See Elms, 439 Md. at n. 3, 9.
In short, as is reflected in Palumbo, Inner Harbor and Elms, if a Claimant does not constitute a “covered employee” under the Workers’ Compensation Act, regardless of whether the alleged relationship is between the Claimant and principal contractor, or the Claimant and his direct employer, LE § 9-508 is inapplicable.
3) Is the subcontractor’s workers’ compensation insurance insufficient?
A Claimant is strictly barred from seeking compensation under a principal contractor’s policy if coverage in Maryland is available via the subcontractor. Elms, 439 Md. at 403 (“By its terms, § 9-508 only operates to make a principal contractor liable when an employee is unable (apparently for whatever reason) to recover from his direct employer, the subcontractor.”) (emphasis added). In Inner Harbor, supra, the Claimant qualified as a covered employee because he was a corporate officer who did not affirmatively opt out of coverage, but in reality, his corporation was uninsured. Nevertheless, the Court held that the Claimant was entitled to compensation under the principal contractor’s policy. Elms, 439 Md. at 402 (discussing Inner Harbor, supra). However, if the corporation had had workers’ compensation insurance, then the Claimant would have been barred from relying on the statutory employer provision to collect under the principal contractor’s policy, as his sole remedy would have been under his corporation’s policy.
Furthermore, the statutory employer provision pertains exclusively to workers’ compensation coverage in Maryland. Even if the direct employer maintains workers’ compensation coverage in another jurisdiction, a principal contractor may still be liable under LE § 9-508. For example, in W.M. Schlosser v. Uninsured Employers’ Fund, infra, a subcontractor maintained workers’ compensation insurance in Washington D.C., where the injury in question occurred. Although the Court of Appeals would eventually find LE § 9-508 inapplicable for unrelated reasons, the fact that the subcontractor had coverage in D.C. was immaterial to the analysis of Maryland benefits. See W.M. Schlosser, 414 Md. 195 (2010).
To summarize: “when a common law employer/employee relationship exists between the injured workers and his or her direct employer (e.g., a subcontractor), but the injured worker is unable to recover compensation benefits [in Maryland] through the employer, only then do we analyze the constructs of the relationship of the injured worker and the principal contractor under § 9-508.” Elms, 439 Md. at 404 (emphasis added).
4) Would the Claimant be a covered employee if he/she was the direct employee of the principal contractor?
By its express terms, the statutory employer provision states that “[a] principal contractor is liable to pay to a covered employee . . . any compensation that the principal contractor would have been liable to pay had the covered employee been employed directly by the principal contractor.” LE § 9-508(a) (emphasis added). To exemplify this aspect of LE § 9-508, consider the case of W.M. Schlosser v. Uninsured Employers’ Fund, 414 Md. 195 (2010).
The question before the Court was whether the principal contractor (Schlosser) was liable as a statutory employer under LE § 9-508. The Claimant’s direct employer (the subcontractor) was uninsured in Maryland. While the injury in question occurred on a job site in Washington D.C., the Claimant was nonetheless deemed to be a covered employee in Maryland because he had been employed by his direct employer to perform work at several job sites throughout the State. See id. at 208-09.
However, as for the principal contractor, the Claimant’s employment was “solely” for work in the District of Columbia. Pursuant to LE § 9-203, “an individual who is employed wholly outside of this State is not a covered employee.” Therefore, with respect to Schlosser, the Claimant did not qualify as a covered employee, again because he was employed “solely” to work in Washington D.C. See id. at 207-09.
The Claimant filed a workers’ compensation claim in Maryland for the injuries incurred on the job in D.C., even though his direct employer only had workers’ compensation coverage in the District of Columbia. This was possible because the Claimant constituted a covered employee in Maryland with respect to his direct employer, regardless of the employer’s uninsured status in the State. Because the Claimant was a covered employee of an uninsured employer, he was entitled to workers’ compensation benefits in Maryland. Thus, the question became whether said benefits were payable via the Uninsured Employers’ Fund, or alternatively, through the principal contractor’s policy pursuant to LE § 9-508.
The Court of Special Appeals determined that Schlosser was liable under the statutory employer provision because the Claimant was a covered employee of the subcontractor, which “automatically” rendered him a covered employee of the principal contractor under LE § 9-508. Id. at 198-99. However, the intermediate appellate court’s decision was subsequently reversed by Maryland’s highest court. Id. at 199.
The Court of Appeals read LE § 9-508(a) literally and held that a principal contractor is liable for the amount that would have been due “had the covered employee been employed directly by the principal contractor.” The Court determined that, had the Claimant been the direct employee of Schlosser, he would not have constituted a covered employee under LE § 9-203, because he was employed solely for work that was to be done “wholly outside of” Maryland. Accordingly, the statutory employer provision did not impose liability on Schlosser, and thus the Claimant’s benefits were to be paid through the Uninsured Employers’ Fund. Id. at 209.
In Maryland, an injured worker is entitled to workers’ compensation only if he or she qualifies as a covered employee. The statutory employer provision imposes liability on a principal contractor when an injured worker is unable to collect from his direct employer, provided that the Claimant would have qualified as a covered employee if employed by the principal contractor directly. However, if a common law employment relationship exists between an employee and a principal contractor, LE § 9-508 is inapplicable because the covered employee is able to collect directly from the principal contractor.