An Employee is an Employee Even If the Employer Does Not Deduct Taxes
Shelter Mutual Insurance Company sued seeking a declaratory judgment that neither its insured, Double J Timber Company, Inc., nor Terry Johnson were entitled to indemnity and defense for claims pending against them in a state court wrongful death action. The district court granted Shelter’s motion for summary judgment, finding the subject policy’s “Employee Exclusion” provision precluded coverage. In Shelter Mutual Insurance Company v. Double J Timber Company, Incorporated; Dorothy Johnson; Christopher Johnson; Summer Johnson; Julie Pace, individually and as wrongful death beneficiaries of Jerry Lee Johnson, deceased, No. 19-60421, United States Court of Appeals for the Fifth Circuit (February 4, 2021) The Fifth Circuit was asked to decide applicability of the exclusion and the employment status of the decedent and the operator.
In early 2017, Jerry Johnson and his brother Terry Johnson began exclusively performing logging services for Double J, a company owned by their cousin, Jimmy Johnson. Jerry and Terry had also done work for Double J prior to 2017, as independent contractors. However, the working relationship changed after Jerry’s own company, CTJ Logging, filed for bankruptcy in late 2016 and lost most of its equipment. According to Jimmy’s deposition testimony, after filing for bankruptcy, Jerry asked Jimmy, “Will you give me a job?” And Jimmy said, “Yes, I will.”
Jerry became a foreman for Double J. And Terry, who had always worked for Jerry, also began working for Double J following CTJ Logging’s bankruptcy.
After their transition, the way Jerry and Terry were paid by Double J also changed. Before the bankruptcy, Jimmy paid Jerry by the job (or load of timber), as opposed to paying him a daily wage. This was because CTJ Logging had its own equipment, which Jerry and Terry operated. After the bankruptcy, however, Jimmy paid Jerry and Terry a daily wage, as he did with the rest of the crew members working for Double J. A tragic accident occurred. While operating Double J’s skidder, a machine used to move cut trees, Terry mistakenly overran his brother Jerry, resulting in Jerry’s death. Jerry’s beneficiaries later filed a wrongful death action against Double J and Terry.
Well before the accident and wrongful death action, Shelter issued a standard general liability policy to Double J. The policy contained the following exclusion: “This insurance does not apply to: . . . d. Workers’ Compensation and Similar Laws Any obligation of the insured under a workers’ compensation, disability benefits or unemployment compensation law or any similar law. e. Employer’s Liability “Bodily injury” to: (1) An “employee” of the insured arising out of and in the course of: (a) Employment of the insured; or (b) Performing duties related to the conduct of the insured’s business;…”
Shelter alleged that by virtue of the policy language and Mississippi law, Double J and Terry were not entitled to indemnity or defense because the policy’s “Employee Exclusion” provision applied. The district court granted Shelter’s motion for summary judgment, concluding Terry and Jerry Johnson were employees, not independent contractors, of Double J. Defendants appealed
Because the relevant policy provisions are unambiguous, the only question before the Fifth Circuit is whether Jerry was working as a Double J employee or as an independent contractor when the accident occurred. If Jerry was an employee, as Shelter contends, the policy’s “Employee Exclusion” provision applies, and Shelter has no duty to defend or indemnify Double J and Terry. But if Jerry was an independent contractor, as Defendants allege, the “Employee Exclusion” provision does not apply.
Mississippi law, like most states, sets forth seven factors to consider in making a determination of who is an employee:
- The extent of control exercised over the details of the work;
- Whether or not the one employed is engaged in a distinct occupation or business;
- The skill required in the particular occupation;
- Whether the employer supplies the tools and place of work for the person doing the work;
- The length of time for which the person is employed;
- The method of payment, whether by the time or by the job; and
- Whether or not the work is a part of the regular business of the employer. [Miss. Emp’t Sec. Comm’n v. PDN, Inc., 586 So. 2d 838, 841-42 (Miss. 1991) (citing Miss. Emp’t Sec. Comm’n v. Plumbing Wholesale Co., 69 So. 2d 814 (1954)).]
The primary consideration is the right to or degree of control. Jimmy himself stated in his deposition that he would “show [Jerry] the road and where to go in [to do his cutting work].” And he also testified that he “required [Jerry and his crew] to have safety meetings and talk.” Jerry, as Double J’s foreman, was simply a “model employee,” even if he was “the boss” on site. Jimmy said as much in his deposition.
Double J Timber Company, Inc. is in the logging business. Jerry performed services that were a regular part of Double J’s everyday work, serving as a foreman for Double J’s logging crew. Double J’s owner testified in his deposition that he fired two other crew members in order to give Jerry and Terry jobs in early 2017.
The evidence regarding the fourth factor is clear and undisputed—Double J . . . owned and supplied all of the tools, supplies, and place of work for . . . Jerry Johnson. Along the same line, while Jerry had only worked for Double J for approximately six months, he worked exclusively and continuously for Double J during this time period with no indication that he intended to stop working at any certain point. The sixth factor, the method of payment, suggests employment as well. The method of payment at the time of the accident indicates that Jerry and Double J had an employee-employer relationship even though Double J did not withhold the appropriate taxes. Finally, the seventh factor, whether the work Jerry performed was part of the regular business of Double J, revealed that Jerry performed services that were a regular part of Double J’s everyday work when he worked as a foreman for Double J’s logging crew.
Applying Mississippi law to the undisputed record, Jerry was working as an employee of Double J, not as an independent contractor, at the time of the accident. The “Employee Exclusion” provision of Double J’s insurance policy with Shelter therefore applied, and the district court properly entered summary judgment for Shelter.
Commercial General Liability insurers usually exclude injuries to employees because the employer and employee are protected by Workers’ Compensation laws. Workers’ Compensation is an exclusive remedy against the employer and co-employees. The employee exclusion was clear and unambiguous and therefore the CGL insurer, Shelter, owed neither a defense nor indemnity to Double J nor to the brother of the decedent.
© 2021 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
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