On December 11, 2017, the New Jersey Supreme Court handed injured employees and struggling small businesses in New Jersey a huge victory. In Vitale v. Schering-Plough Corp., A-20-16; 078294 (N.J. December 11, 2017), the Court of Appeals affirmed a trial court’s ruling that a contractual limitation on the right of an employee to sue a third-party tortfeasor was unenforceable as against public policy. The Supreme Court affirmed that decision, preserving the employee’s right to sue and the employer’s (and its workers’ compensation carrier) right to reimbursement from that lawsuit, despite a written waiver which the employee agreed to.
In Vitale v. Schering-Plough Corp., 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. 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 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, arguing that the waiver should have prevented Vitale from suing.
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 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 the 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. Schering appealed to the New Jersey Supreme Court.
On December 11, 2017, the Supreme Court affirmed the Court of Appeals’ decision. Trial lawyers, small employers, and the subrogation faction of the insurance industry were all hoping the Supreme Court would rule the way it did. This decision does more than protect an injured accident victim from devastation because of something he or she had to sign to get or keep a job. It also restores and gives new life to the public policy underlying a significant portion of our U.S. economy – the societal decision made over 100 years ago when we decided the poor employer was going to bear the weight of employee injuries – large or small – even if they weren’t at fault. The Vitale decision keeps a promise made long ago. If the owner of a small company is going to be forced to bear the brunt of literally millions of dollars in medical expenses for an accident it played no role in causing, we, as a society, are going to give it immunity from suit and allow it the right to recover those medical payments if they were caused by somebody other than the employer or the employee – i.e., a third party.
The basis for the Vitale decision is quite simple. Either the contract in which the employee purportedly was forced to give up his rights to the civil justice system was (1) a contract of adhesion (a contract drafted by one party, usually a business with stronger bargaining power) and signed by another party (usually one with weaker bargaining power), or (2) an exculpatory agreement (a contractual provision contained in a contract between two parties, relieving one party from any liability resulting from loss or damage sustained by the other party). In either case, New Jersey has consistently held that such agreements or contracts will not be enforced if they are contrary to or offend public policy. The court held that, no matter which of these the contract in Vitale was, it violated public policy.
The “public policy” which was violated is found in §§ 39 and 40 of the New Jersey Workers’ Compensation Act. As part of the societal contract made over 100 years ago, § 40 grants the carrier a right to be reimbursed from a tortfeasor responsible for causing the accident. Section 39, on the other hand, expressly declares any “agreement, composition, or release of damages made before the happening of any accident” to be contrary to public policy. Section 39 is not limited to agreements to waive workers’ compensation benefits; it also governs Vitale’s pre-accident agreement to forego any third-party claim against third-parties (specifically Schering-Plough) if he sustained a work-related injury on its premises. Section 39’s plain language voids the Disclaimer in this case. The court held that this section encompassed not only pre-injury waivers of compensation benefits, but also agreements waiving the employee’s right to assert a common law action against a third-party tortfeasor. In many ways, the workers’ compensation carrier was a bystander beneficiary of the court’s compassion for the injured employee under these circumstances. Because the employee can sue, the employer or its workers’ compensation carrier retains its rights of subrogation (when it sues a third party) or reimbursement (when it merely seeks repayment from the employee’s tort recovery).
Courts in many states have long allowed a workers’ compensation carrier to waive its rights of reimbursement and subrogation, because it is a sophisticated party to the contract and can charge an increased premium for doing so. The employee, however, is usually not as sophisticated, and certainly negotiates from a position of legal and economic disadvantage.
Not too long ago, a Wall Street Journal article quoted the CEO of a leading U.S. carrier describing workers’ compensation as a “time bomb.” Even the National Council on Compensation Insurance (NCCI) – the statistical and rating organization for a majority of states – recently described the workers’ compensation market as “precarious.” Its 2011 Annual Issues Report, which rates profitability, reported a combined ratio of 110 for workers’ compensation in 2009. The 110-combined ratio means that for every $1.10 in claims and expenses, the carrier receives $1.00 in premiums.
Subrogation is one of the few variables affecting the profitability of workers’ compensation over which we have control, and it has been under attack for decades. Workers’ compensation subrogation is much different from other forms of subrogation and should be treated as such. Workers’ compensation legislation first came into being in 1911 when Wisconsin became the first state to adopt workers’ compensation legislation. By 1948, every state had some form of “workman’s compensation.” Such legislation had its roots in socialism and is a social contract in which employers are mandated by law to pay unlimited medical expenses and lost wages when employees are injured while working – even if the employer is absolutely without fault. In exchange for this social safety net, workers’ compensation becomes a worker’s exclusive remedy against their employer, and the employer is given immunity from liability. As part of the contract, the employer (or its insurance carrier) is also entitled to be reimbursed for any benefits paid whenever a third-party tortfeasor (somebody other than the employer or employee) is responsible for the injury or death. Unfortunately, courts and legislatures have begun eroding away the employers’ end of the bargain, rendering them liable both when they are at fault and when they are not. At the same time, their rights of reimbursement have also been assailed.
If employers and those who contract with them can add a few sentences to a contract and nullify this most important and valuable right of subrogation, the practice will become commonplace. History bears this out. Legislatures beholding to the trial lawyers’ lobbies in many states have already allowed employer negligence, the Made Whole Doctrine, the Common Fund Doctrine, statutory employee fictions, and settlements without the requirement of honoring workers’ compensation liens. Lien reduction statutes and crazy “equitable reduction” statutes, which have been construed to allow a judge to wipe out huge workers’ compensation liens simply because the injured employee and his wife had just bought their “dream home,” have infected the contract society made with employers and their workers’ compensation insurers.
The Vitale decision is a victory for the little guy (the injured employee) and the big guy (the employer or its workers’ compensation insurer). It allows the employer to pursue those responsible for causing the accident in the first place and helps hold down workers’ compensation insurance premiums (one of its largest expenses) for small businesses, because subrogation reduces their experience modifiers. During oral arguments, Justice Jaynee LaVecchia (Independent) seemed to imply that the employer was “buying peace” with Schering at the expense of its employee. Their decision ultimately shows that such an arrangement is against public policy and will not be allowed.
For questions regarding this article or workers’ compensation subrogation in general, please contact Gary Wickert at [email protected].