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By Tod J. Everage

In December 2015, the U.S. 5th Circuit (in a 2-1 decision) was called to decide whether a non-operating partner in a joint venture qualified as a “statutory employer” under the Louisiana Workers’ Compensation Act (“LWCA”), La. R.S. § 23:1021, even though that party did not sign the contract and was not specifically mentioned in the contract at all. In Wright v. Excel Paralubes, 807 F.3d 730 (5th Cir. 2015), the Court concluded that it was.

The LWCA provides that a principal qualifies as the statutory employer of a contractor if: (1) the contractor subcontracts out a portion of the work (“two contract theory”) or (2) the principal and contractor have a contract recognizing the principal as the statutory employer of the contractor’s employees. In the second case, the contract creates a rebuttable presumption that may be overcome only if the employee can show that his work was not “an integral part of or essential to the ability of the principal to generate that individual principal’s goods, products, or services.” La. R.S. § 23:1061.A(3). If the presumption cannot be overcome – and it rarely can – the principal is afforded the same statutory immunity under the LWCA as the contractor. Thus, the “statutory employer defense” has become a valuable litigation tool for operators facing exposure for injuries to employees of its contractors in Louisiana (both onshore and in state territorial waters).

In this case, Excel Paralubes and Conoco agreed to construct and jointly own a lubricating base oil plant in Westlake, Louisiana. The parties designated Conoco as the construction manager and operator of the plant. In that role, Conoco contracted with Wyatt Field Service Co. to perform work on a vacuum tower at the facility. In the Master Service Agreement between Conoco and Wyatt, Conoco included the talismanic statutory employer language addressing the essential nature of Wyatt’s work for Conoco. During Wyatt’s work at the facility, one of its boilermakers (Wright) was injured. Wright sued both Conoco and Excel. Both Conoco and Excel successfully argued to the Western District of Louisiana that they were the statutory employers of Wright, and thus, entitled to the statutory immunity under the LWCA. Wright appealed, arguing that because Excel did not sign the MSA, it could not benefit from the statutory employer defense.

Relevant to the 5th Circuit’s analysis, the MSA defined “Affiliate” as “a company … which is specifically identified to one party as an entity for which the other party has operating or management responsibilities.” Further, Paragraph 12 extended all “exclusions of liability and indemnities … above and elsewhere in this Agreement” to Conoco’s affiliates. Again, the MSA had the required statutory employer language benefiting Conoco contained in Exhibit G to the contract, but the issue was whether that extended to Excel, a non-operating joint venturer of the facility. The 5th Circuit noted that the Louisiana Supreme Court had yet to weigh in on this issue, thus, an Erie guess was necessary. Taking cue from intermediate Louisiana appellate courts, the 5th Circuit noted that “statutory employer status is liberally favored,” and that other courts have rejected “rigid application of La. R.S. 23:1061(A)(3),” finding that there is a “broad view of what constitutes a statutory employer.” However, in each case reviewed, the non-signing party was at least mentioned in the contract. Here, Excel’s name is nowhere to be found in the MSA.

Regardless, the 5th Circuit was persuaded by the reviewed state court opinions and found that the same “broad presumption of statutory employer status,” should apply to Excel in this case based upon the terms of the MSA. Importantly, Excel fell within the MSA’s definition of “Affiliate” to whom “all exclusions and liabilities” apply. And, since Conoco was deemed a statutory employer in Exhibit G, that same “exclusion of liability” extended to Excel, as Conoco’s affiliate. The Court further reasoned that “[n]ot only did Conoco, as operator, enter into a contract on Excel’s behalf as a co-owner, but Conoco is also a co-owner of the joint venture.” Thus, Conoco’s execution of the contract inured to the benefit of, and could have been enforced by the co-owner Excel.

Even more broadly though, the 5th Circuit stated: “we do not think the parties’ failure to name or require the signature of Excel in the MSA can overcome the broad presumption of statutory employer status approved by Louisiana courts …” Moreover, the “very purpose of Conoco and Excel in creating the joint venture was to give Conoco the exact operational authority it exercised on behalf of the joint venture when it signed the MSA with Wyatt.” Thus, the MSA should be read to recognize this relationship. “The liberal attribution of statutory employer status by Louisiana courts in cases like this reflects economic realities and efficiency.” Because Excel would certainly expect to be protected by and to benefit from the same contractual obligations Conoco negotiated for itself on behalf of the joint venture, courts should “promote efficiency by reaching the decision that aligns with the parties’ rational expectations.” Accordingly, the 5th Circuit affirmed the district court’s ruling.

While this case did rely upon the actual language of the MSA, the 5th Circuit was clearly persuaded that Louisiana believes the statutory employer relationship is broad and subject to a liberal interpretation. Operators with Louisiana assets, especially those who are non-operating owners of Louisiana assets, should routinely have their contracts reviewed to ensure that this very valuable defense is available to them through the MSA. Though being specifically named in the contract is the best way to avoid the confusion, this decision reveals the 5th Circuit’s understanding of the business structures and ventures that may exist and its intention to align the contracts with those parties’ expectations. And, once the Court has found that the requisite language is set forth in the contract, it is very difficult for the contractor to rebut the presumption that its work is not integral to the principal’s business. As the Eastern District of Louisiana once noted, the only contractor that has successfully rebutted the presumption so far was a luxury beautician service at a nursing home.