Business Court Weighs in on Employee vs. Independent Contractor Dispute Regarding Insurance Coverage

(September 13, 2016) There are a number of legal issues that can be triggered depending upon whether a worker is an independent contractor or an employee. The Kent County Business Court recently addressed this issue in a somewhat unusual setting when it determined that a worker was an independent contractor of defendant, rather than an employee, and, as a result, the plaintiff insurance company had a duty to defend and indemnify the defendant company against the worker’s claims.

In the case, the worker, Alvarez, answered an ad on Craigslist to work for the defendant Heiss. Within days of starting work, Alverez’s hand was severely injured, requiring surgery. He went back to work for Heiss after the surgery, but only briefly. He eventually filed suit against Heiss, who then sought coverage under its commercial liability policy with plaintiff Progressive Insurance. Progressive denied coverage, arguing that the worker was an employee and thus coverage was barred under three separate policy exclusions.

Much to the Court’s annoyance, the parties requested Business Court evaluate whether the worker was an employee using two separate tests in order to determine whether the exclusions applied. The Court first considered the 20-factor test used by the IRS in a workers-compensation context, finding that most, though not all, of the 20 factors weighed in favor of Alvarez as an independent contractor, including the fact that he was not given training by Heiss, had no set work hours, could work for other employers, and was not compensated for business or travel expenses, and Alvarez had to supply his own gloves and safety googles.

The Court went on to consider the 4-factor economic-reality test: (1) control of worker’s duties, (2) payment of wages, (3) right to hire, fire, and discipline, and (4) performance of duties towards a common goal. The Court concluded that Alvarez performed odd jobs with little to no supervision, worked and left when he chose (including to serve a jail term), and Heiss did not take deductions from his pay for taxes or other expenses. Thus, Alvarez was not deemed an employee under the economic-reality test.

As Alvarez was not Heiss’s employee, the Court ruled that Progressive had a duty to defend and indemnify Heiss in the underlying civil case brought by Alvarez against Heiss. The Court specifically noted that the entire dispute could have been avoided if the insurance company had simply defined “employee” in its policy, saving everyone significant time and money.

To read the full case, click here. For further information regarding litigation issues, contact one of our Commercial and Business Litigation Attorneys. For more information regarding employment issues, contact a member of Rhoades McKee’s Employment Team.