Is Waiver Of Third-Party Rights By Employee Enforceable?

There is seemingly no end to the attacks on a workers’ compensation carrier’s rights of subrogation and reimbursement when a third-party is liable for a work-related injury. In New Jersey, however, the Supreme Court will soon be deciding whether even the employee is prohibited from suing a customer of his employer, when forced to sign a waiver of this right as a condition of employment. On Tuesday, SeNew Jersey Flagptember 26, 2017, lawyers for Philip Vitale and Schering-Plough Corporation — through successor Merck & Co. — argued their case to the New Jersey Supreme Court. With the Supreme Court consisting of three Republicans, three Democrats, and one Independent, it is a coin toss as to how the court will rule.

In Vitale v. Schering-Plough Corp., 146 A.3d 162 (N.J. App. 2016), cert. granted, 157 A.3d 842 (N.J. Dec. 5, 2016), Phillip Vitale was employed as a security guard by Allied Barton Security Services, LLC (Allied Barton), which contracted with defendant Schering-Plough Corporation (Schering) to provide security services at Schering’s facilities. At the commencement of his employment with Allied Barton, Vitale was required to sign a waiver of his right to sue any of Allied Barton’s customers “to which [he] may be assigned, arising from or related to injuries which are covered under the Workers’ Compensation statutes,” as a condition of his employment. The waiver read as follows:

As a result, and in consideration of Allied Security offering me employment, I hereby waive and forever release any and all rights I may have to:

– make a claim, or

– commence a lawsuit, or

– recover damages or losses

from or against any customer (and the employees of any customer) of Allied Security to which I may be assigned, arising from or related to injuries which are covered under the Workers’ Compensation statutes.

Although he was assigned to many of the defendant’s work sites, Vitale was never directly employed by Schering, which had its own in-house security employees. In August 2009, Vitale was injured while working at Schering’s work site. He received workers’ compensation benefits from Allied Barton and also filed a personal injury suit against Schering. A jury subsequently found Schering negligent and awarded $900,000 in damages. Schering appealed to the Court of Appeals.

As a matter of first impression, the Court of Appeals affirmed the trial court ruling that the contractual limitation on Vitale’s ability to sue Schering-Plough was unenforceable as against public policy as expressed in case law and contrary to the letter and spirit of the Workers’ Compensation Act (WCA). It held that the waiver was an impermissible contract of adhesion and that plaintiff could sue Schering. As a result, Allied Barton and its workers’ compensation carrier would presumably also be entitled to recover its subrogation lien – a win for New Jersey small employers.

The Court of Appeals noted that not all employment contracts that limit the rights of employees are contracts of adhesion. Rodriguez v. Raymours Furniture Co., 138 A.3d 528 (N.J. 2016). However, when an employee has little to no bargaining power and a contract is presented on “a take-it-or-leave-it” basis, the contract is one of adhesion. Allied Barton’s waiver requirement constituted a contract of adhesion similar to the agreement to arbitrate contained in the employment application in Rodriguez. The plaintiff had no ability to bargain. He had the choice of either signing the waiver as part of his being hired or turning down the needed job. Although a court may enforce a contract of adhesion, such contracts are unenforceable if unconscionable. Exculpatory agreements are enforceable if they “clearly and unambiguously reflect the unequivocal expression of the party giving up his or her legal rights that this decision was made voluntarily, intelligently, and with the full knowledge of its legal consequences.” Some are unconscionable, however. For example, one may not contract away the statute of limitations in a case alleging a violation of the New Jersey Law Against Discrimination (LAD), N.J.S.A. §§ 10:5-1 to -49. Rodriguez, supra. Nor may one diminish by contract “a statutorily imposed duty,” nor execute “a pre-injury release from liability for intentional or reckless conduct.” The waiver also creates a disincentive for the defendant to maintain a safe workplace for contractors working on its premises. Conduct that would be considered reckless or intentional under general tort law may result in injuries covered by the WCA and thus unlawfully waived by the disclaimer.

In the final analysis, when taking into consideration New Jersey’s history concerning joint employers, and the policy underpinning New Jersey’s workers’ compensation statute, the Court of Appeals concluded the waiver was unenforceable. Schering appealed to the New Jersey Supreme Court, which accepted the appeal and heard oral arguments on September 26.

Whether the Supreme Court will affirm the Court of Appeals and agree that the waiver is not enforceable, or overturn the decision and hold that an employee can knowingly sign away his or her rights to sue a customer of the employer, remains to be seen. New Jersey’s Supreme Court is composed of three Republicans (normally “pro-business”), three Democrats (normally pro-personal injury plaintiff), and one Independent (swings both ways). It couldn’t be any more balanced politically.

During oral arguments, Justice Jaynee LaVecchia (Independent) seemed to imply that the employer was “buying peace” with Schering at the expense of its employee. Schering’s attorney disagreed, naturally, saying there was a “balancing of interests” with the parties involved. Schering claims that signing away his right to sue a third party was an agreement that Vitale entered into as consideration for employment. Period.

Allied Barton, however, argued that the employment situation for employees such as Vitale had changed in the last 25 years. Years ago, Vitale would have been an employee of Schering and would have been barred from filing a third-party action as a result of the Exclusive Remedy Rule. Contracting for security is a way to keep costs fixed, claimed the employer, who would benefit from a workers’ compensation subrogation recovery in a case like this, but was seemingly arguing for reversal, perhaps due to some indemnity agreement included in the contract.

Chief Justice Stuart Rabner (Democrat) asked the lawyers if the waiver was a violation of public policy. Allied Barton’s counsel answered “No”, adding that this was now the industry norm. Justice Barry Albin (Democrat) added that enforcing the agreement would be at the expense of the employee. Vitale’s attorney naturally agreed with Albin, stating that the Court of Appeals got it right and that its decision should be upheld. He argued that the waiver was clearly a contract of adhesion.

It remains to be seen how the Supreme Court will rule in this case. However, one thing is certain. Reversal will result in two victims: the employee and small businesses across New Jersey. If the decision is reversed and the waiver is enforced, we can expect to see an industry trend wherein employees are required to sign such waivers as a condition of employment. That would have a devastating effect on the positive effect subrogation has on holding down workers’ compensation premiums for small businesses in New Jersey and across the country.

For questions regarding this article or workers’ compensation subrogation in general, please contact Gary Wickert at gwickert@mwl-law.com.

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Gary L. Wickert
Partner

Gary L. Wickert is an insurance trial lawyer and partner with the law firm of Matthiesen, Wickert & Lehrer, S.C. Gary has nearly four decades of litigation experience and is regarded as one of the world’s leading experts on insurance subrogation. He is the author of several subrogation books and legal treatises and a national and international speaker and lecturer on subrogation and motivational topics.