The Hazards of Using a Professional Employer Organization

Exclusive Remedy Only Applies to Employee Injured in Scope of Employment

Across the nation Workers’ Compensation is an exclusive remedy for an employee injured on the job. However, modern practice allows employers to use Professional Employer Organizations (PEOs) or employee leasing organizations to create a co-employer relationship where the PEO and the actual employer become co-employers of each worker and although officially an employee of the PEO the employee is also an employee of the company that contracted with the PEO for the purpose of workers’ compensation.

In Rodriguez v. Lockhart Contracting Services, Inc., Court of Appeals of Texas, — S.W.3d —- , 2016 WL 3568039 (June 29, 2016) a Texas appellate court was faced with the need to determine who employed whom and who was on first for workers’ compensation and traditional tort damages, if anyone.

Lockhart Contracting Services, Inc. a/k/a Lockhart Contracting Services (“Lockhart”) claimed, when its employee Rodriguez was injured on the job he was also an employee of a PEO with whom Lockhart had contracted. Rodriguez argued he was not an employee of Lockhart and the PEO because he had never signed documents acknowledging an agreement Lockhart had with a new PEO. Summary judgment was granted and Rodriguez appealed.

BACKGROUND

Rodriguez claims he was hired by John Lockhart of Lockhart Contracting on February 18, 2011, at a Lockhart Contracting jobsite in Sweetwater, Texas. Both parties agree that on the 18th, Rodriguez signed several documents relating to his employment. At the time Rodriguez began working at Lockhart Contracting, it had a professional employer services agreement with Accent Professional Payroll Services, Inc. f/k/a Texas Diversification Workforce Inc. f/d/b/a TXWorks (“TXWorks”). TXWorks is a licensed PEO, an entity previously known as a staff leasing company.

The summary judgment evidence shows Lockhart Contracting’s employer services agreement with TXWorks was administratively terminated on March 14, 2011, and Lockhart Contracting entered into a new agreement with Prime Source Too (“Prime Source”)—another licensed PEO—effective the very next day. On March 15 or 16, 2011, the day after the change of PEOs, Rodriguez was injured while working at a Lockhart Contracting jobsite in Huntsville, Texas. Rodriguez signed two forms: “Employee’s Report of Accident/Injury” and “Employee Acknowledgment of Workers’ Compensation Network and faxed them to TXWorks on March 31, 2011. The record shows TXWorks submitted the claim to Texas Mutual Insurance Company (“TMIC”) on April 5, 2011.

As a result of Rodriguez’s claim, TMIC paid out almost $52,000.00 in workers’ compensation benefits associated with Rodriguez’s injury.

After Rodriguez received his final temporary income benefits check, he sued Lockhart Contracting and TXWorks. Rodriguez charged a negligence claim against Lockhart Contracting—contending Lockhart Contracting was his employer and a nonsubscriber to the workers’ compensation law.

ANALYSIS

On appeal, Rodriguez contends the trial court erred in granting summary judgment in favor of Lockhart. Rodriguez argues Lockhart was not entitled to summary judgment because it was not entitled to the benefit of the exclusive remedy provision of the TWCA. Lockhart failed to prove as a matter of law (a) its agreement with Prime Source complied with certain provisions of the Labor Code regarding “sharing requirements,” particularly that its agreement with Prime Source, the PEO, gave Prime Source the right to share in the right to hire, fire, discipline, and reassign leased employees, or (b) that Prime Source provided Rodriguez with the required statutory notice of coverage.

In his reply brief, Rodriguez also contends the acceptance of benefits doctrine is inapplicable.

Applicable Law

Unlike workers’ compensation laws in other states, the TWCA permits private Texas employers to choose whether to subscribe to workers’ compensation insurance. The Texas Legislature adopted the TWCA to benefit employers and employees. For employers, the TWCA limits liability through its exclusive remedy provision.

An employee may also be covered by workers’ compensation insurance—and therefore subject to the exclusive remedy provision of the TWCA—if he enters employment with a professional employment organization that has elected to obtain workers’ compensation insurance coverage and has a professional services agreement with a client for whom the employee actually works.

The “coemployment relationship,” is created when the “client,” enters into a written professional employer services agreement with a “license holder.”  

Generally speaking, if either coemployer has elected to acquire coverage under the TWCA, the worker is covered under the TWCA and subject to its mandates, including the exclusive remedy bar—assuming, of course, the worker was in the course and scope of his employment at the time of the injury and the suit is for those claims covered by the TWCA.

However, the court found that there is more than a scintilla of evidence that Rodriguez was not a Prime Source employee at the time of his injury, precluding coverage for the injury suffered by Rodriguez on the Lockhart Contracting jobsite, because he never signed the employment agreement.

Lockhart failed to establish as a matter of law that Rodriguez became a Prime Source employee as a result of some sort of transfer not mentioned in the contract between Prime Source and Lockhart. The agreement between Lockhart and Prime Source specifically speaks to the manner in which a person becomes an employee covered by Prime Source’s workers’ compensation insurance, and that is by completing and returning the documents identified in the agreement—something Rodriguez never did—not by transfer from another PEO.

An employee may be covered by workers’ compensation insurance—and therefore subject to the exclusive remedy provision of the TWCA—if he enters employment with a professional employment organization that has elected to obtain workers’ compensation insurance coverage and has a professional services agreement with a client for whom the employee actually works. Thus, to be entitled to the exclusive remedy provision of the TWCA, it was incumbent upon Lockhart to establish as a matter of law that at the time of his accident, there was a professional services agreement between itself and Prime Source and Rodriguez was a Prime Source employee. Although Lockhart  established the existence of a professional services agreement between itself and Prime Source, taking all summary judgment evidence favorable to Rodriguez as true, indulging every reasonable inference in his favor, and resolving any doubts in his favor, the appellate court held there is more than a scintilla of evidence that Rodriguez was not a Prime Source employee on the day he was injured. Accordingly, because Lockhart Contracting failed to establish as a matter of law that Rodriguez was a Prime Source employee on the day of the accident, the court held Lockhart Contracting failed to establish as a matter of law that Rodriguez’s suit is barred by the exclusive remedy provision of the TWCA.

The issue is whether the trial court, by ruling Rodriguez’s suit was barred by the exclusive remedy provision of the TWCA, per force ruled his suit was likewise barred by the acceptance of benefits doctrine. Given that the doctrine is grounded in equity, is applicable in numerous contexts, and courts addressing it in the context of the TWCA and its predecessor seem to consider it an alternate and separate ground that may bar an employee’s suit against an employer, we hold it is not part of the statutory, exclusive remedy bar of the TWCA. Rather, it is a separate and distinct ground for summary judgment and not part of the TWCA exclusive remedy provision.

Because the trial court specified it was granting summary judgment based on the exclusive remedy bar of the TWCA, making no mention of the alternate ground of acceptance of benefits, and Lockhart brought neither a cross appeal nor a cross-point asserting acceptance of benefits as an alternate ground for affirmance, it has not been preserved for our consideration.

Based on the foregoing, Lockhart did not establish as a matter of law that Rodriguez was a Prime Source employee at the time of his injury, and therefore, failed to conclusively establish its entitlement to the exclusive remedy provision of the TWCA.

Accordingly, the Court of Appeal reversed the trial court’s summary judgment and remand the matter for further proceedings consistent with this court’s opinion.

ZALMA OPINION

Rodriguez accepted workers’ compensation benefits and, because Lockhart failed to move on that ground, and because there was no employer-employee relationship with the PEO, summary judgment was reversed. Lockhart can file a new motion claiming the benefit of the acceptance of benefits doctrine it will probably succeed and find itself back at the court of appeal.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.  He now limits his practice to service as an insurance consultant and expert witness 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.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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