TADC EMPLOYMENT LAW NEWSLETTER — SPRING 2005
R. Edward Perkins, Editor
Benjamin C. Connally, Assistant Editor
Adam Robison, Assistant Editor
Chris M. Knudsen, Assistant Editor
Sheehy Serpe & Ware, P.C. — Houston, Texas
I. United States Supreme Court
A. The United States Supreme Court holds that “disparate impact” cases are available under the Age Discrimination in Employment Act Of 1967, with exceptions.
In Smith v. City of Jackson, the United States Supreme Court recently decided that the Age Discrimination in Employment Act (ADEA) of 1967 authorizes recovery in “disparate-impact” cases. See 161 L. Ed. 2d 410, 416 (2005). In Smith, the City of Jackson, Mississippi adopted a pay plan granting raises to all police officers and police dispatchers. Id. at 416. The plan was motivated, at least in part, by the City’s desire to bring the starting salaries of police officers up to the regional average. Id. Under the plan, officers who had less than five years of tenure received proportionately greater raises than those with more seniority. Id. Although some officers over the age of 40 had less than five years of tenure, a majority of the older officers had more tenure. Id. As a result, a group of older officers filed suit against the City under the ADEA claiming that the City deliberately discriminated against them because of their age (the “disparate treatment” claim) and that they were “adversely affected” by the plan because of their age (the “disparate impact” claim). Id.
The City filed a motion for summary judgment on both claims, and the district court granted the motion. Id. The Fifth Circuit Court of Appeals found that the ruling on the disparate treatment claim was premature because the officers were entitled to further discovery on the issue of intent, but it affirmed the dismissal of the disparate impact claim. See Smith v. City of Jackson, 351 F.3d 183 (5th Cir. 2003). The Fifth Circuit held that disparate impact claims are categorically unavailable under the ADEA. Id. The United States Supreme Court granted certiorari, and the majority determined that the ADEA does authorize recovery in disparate impact cases comparable to Griggs v. Duke Power Co., 401 U.S. 424 (1971). See Smith, 161 L. Ed. 2d at 416.
The Supreme Court began by briefly examining the history of the ADEA and recognizing that the ADEA was enacted shortly after the Civil Rights Act of 1964. Id.at 416-17. The Court also stated that the language within Title VII of the Civil Rights Act is identical to that of the ADEA. Id. at 417. The Court provided:
As enacted in 1967, § 4(a)(2) of the ADEA, now codified as 29 U.S.C. § 623(a)(2), provided that it shall be unlawful for an employer “to limit, segregate, or classify his employees in any way which would deprive or tend to deprive any individual of employment opportunities or otherwise adversely affect his status as an employee, because of such individual’s age .” Except for substitution of the word “age” for the words “race, color, religion, sex, or national origin,” the language of that provision in the ADEA is identical to that found in § 703(a)(2) of the Civil Rights Act of 1964 (Title VII). Other provisions of the ADEA also parallel the earlier statute. Unlike Title VII, however, § 4(f)(1) of the ADEA, contains language that significantly narrows its coverage by permitting any “otherwise prohibited” action “where the differentiation is based on reasonable factors other than age” (hereinafter RFOA provision).
See id. (citations omitted). “When Congress uses the same language in two statutes having similar purposes, particularly when one is enacted shortly after the other, its appropriate to presume that Congress intended that text to have the same meaning in both statutes.” Id. (citing Northcross v. Board of Ed. of Memphis City Schools, 412 U.S. 427, 428 (1973)). Since the Court had previously held that the language of the ADEA was derived haec verba from Title VII, the Court determined that its unanimous opinion in Griggs is compelling precedent. Id. at 418.
In Griggs v. Duke Power Co., the Supreme Court provided “practices, procedures, or tests neutral on their face, and even neutral in terms of intent,” cannot be maintained if it results in a discriminatory impact. See 401 U.S. at 429-30. “[G]ood intent or absence of discriminatory intent does not redeem employment procedures or testing mechanisms that operate as ‘built-in headwinds’ for minority groups and are unrelated to measuring job capability.” Id. at 432. In Griggs, the Court explained that, when enacting Title VII, Congress “directed the thrust of the Act to the consequences of employment practices, not simply to the motivation.” Id. (emphasis in original). In Smith, the Court recognized that the text of the ADEA also “focuses on the effects of the action on the employee rather than the motivation for the action of the employer.” 161 L. Ed. 2d at 419.
Further, the Court noted that both the Department of Labor, which initially drafted the legislation, and the EEOC, which is the agency charged by Congress with responsibility for implementing the statute, have consistently interpreted the ADEA to authorize relief on a disparate-impact theory. Id. at 421. Therefore, the Supreme Court held that it was error for the Fifth Circuit to categorically deny disparate impact cases under the ADEA. Id.
However, the Court found that the scope of disparate impact liability under the ADEA is narrower than under Title VII due to difference in language between these two Acts. See id. First, the RFOA provision states that it is not unlawful for an employer “to take any action otherwise prohibited under subsection (a) where the differentiation is based on reasonable factors other than age discrimination .” Id. In an ADEA disparate impact case, an employer will not be liable if the adverse impact was attributable to a nonage factor that was “reasonable.” Id. “Congress’ decision to limit the coverage of the ADEA by including the RFOA provision is consistent with the fact that age, unlike race or other classifications protected by Title VII, not uncommonly has relevance to an individual’s capacity to engage in certain types of employment.” Id.at 422.
Turning to the facts of Smith, the Supreme Court found that the officers failed to provide sufficient evidence to support a disparate impact case. See id. The Court stated that the officers had done little more than point out that the pay plan at issue was relatively less generous to older workers than younger workers. Id. They did not identify any specific test, requirement, or practice within the pay plan that has an adverse impact on older workers. Id. “It is not enough to simply allege that there is a disparate impact on workers, or point to a generalized policy that leads to such an impact. Rather, the employee is ‘responsible for isolating and identifying the specific employment practices that are allegedly responsible for any observed statistical disparities.'” Id. (quoting Wards Cove Packing Co. v. Atonio, 490 U.S. 642, 656 (1989)).
The Court also determined that the City’s pay plan was based on reasonable factors other than age. Id. Essentially, the pay plan was designed to bring the salaries of its officers’ within a competitive level with surrounding areas. Id. at 422-23. While the percentage of pay increases of more senior officers was less that those of more junior officers, the raises received by most senior officers were actually higher in amount. Id. In conclusion, the Court stated that the disparate impact was attributable to the City’s decision to give raises based on seniority and position, and reliance on seniority and rank was “unquestionably reasonable given the City’s goal of raising employees’ salaries to match those in surrounding communities.” Id. at 423.
Accordingly, an employee may bring a disparate impact case against his employer under the ADEA. However, disparate-impact liability under the ADEA will be narrower than disparate impact liability under Title VII. Under Title VII, good intent or absence of discriminatory intent does not redeem employment procedures that have a discriminatory impact. However, under the ADEA, an employer will not be held liable for practices that have an adverse impact on older workers if the complained-of practice is based on reasonable, nonage factors.
II. Fifth Circuit Decisions
A. Federal Arbitration Act does not create independent basis for federal jurisdiction.
In Smith v. Rush Retail Centers, Inc., 360 F.3d 504 (5th Cir. 2004), Cole Smith filed suit in the district court seeking to vacate an arbitration award entered in favor of Smith’s former employer, Rush Retail. Although Rush did not object to the district court’s jurisdiction, a magistrate judge determined that there was no basis for federal jurisdiction because the parties were not diverse and the complaint did not allege a federal question. Over Smith’s objections, the district court concurred with the magistrate judge’s determination and dismissed for lack of jurisdiction both Smith’s complaint and Rush’s counterclaim for attorney’s fees. The court denied Smith’s timely motion to amend the judgment or, alternatively, for rehearing.
The court affirmed the judgment dismissing the complaint. The U.S. Supreme Court has held that section 4 of the Federal Arbitration Act, which authorizes the filing of a petition to compel arbitration in the district court, does not create an independent basis for federal jurisdiction. Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983). For a federal court to enter an order to compel arbitration under section 4, “there must be diversity of citizenship or some other independent basis for federal jurisdiction before the order can issue.”
Although Moses Cone arose in the context of section 4, the Fifth Circuit applied this conclusion with equal force to section 10. Recognizing that it is well established that the FAA is not an independent grant of federal jurisdiction, the court also noted that it had not addressed whether this rule applies in the section 10 context, but other circuits had. Notably, the Second, Sixth, Seventh, Ninth, Eleventh, and District of Columbia Circuits all had held that there must be an independent basis for federal jurisdiction before a district court can consider vacating an arbitration award.
The court rejected Smith’s argument that Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001) holds that arbitration of employment contracts always involves a federal question. In that case, federal jurisdiction was not at issue, as jurisdiction was based on diversity. At issue was FAA section 1, regarding employment contracts with respect to transportation workers. The U.S. Supreme Court’s application of the section 1 exemption to employment contracts involving the transportation industry is irrelevant to the existence of federal subject matter jurisdiction.
The court concluded that the complaint did not allege a federal question or that under the facts alleged there was another basis for federal jurisdiction.
B. A two year limitations period applies to claims for unpaid medical benefits.
In Lopez v. Premium Auto Acceptance Corp., 389 F.3d 504 (5th Cir. 2004), Lopez filed suit on behalf of her deceased mother, Gloria Gutierrez, challenging the grant of summary judgment on her ERISA and COBRA claims. Premium terminated Gutierrez three days after her return from surgery to treat her lung cancer, and did not provide the statutorily required notice informing her that she could continue her insurance coverage under the employee benefit plan. Her insurance was canceled and she accumulated $33,000 in medical bills that would have been covered by the plan prior to her death. Lopez requested Premium to reimburse the estate for some of the medical bills, but Premium notified Lopez that her mother was not entitled to COBRA benefits because Premium had less than 20 employees. Lopez filed suit.
Recognizing that neither ERISA nor COBRA provides a statute of limitations for certain claims the court reaffirmed the usual rule that a court should apply the state statute of limitations for the most nearly analogous state cause of action. Since the ERISA § 510 claim was analogous to wrongful discharge and discrimination, the court held the Texas two-year statute of limitations for such claims applied. Since the COBRA claim was analogous to an unfair insurance practice claim, the court held the Texas two-year statute of limitations applied there as well. The court rejected the plaintiff’s argument that the four-year statute of limitations should apply holding that these claims were not as closely analogous to contract claims. Since the plaintiff did not bring suit within two years, the court affirmed summary judgment for Premium.
III. Federal District Court Decisions
A. Drug tests administered pursuant to company policy do not amount to discrimination.
In Thompson v. Exxon Mobil Corp., 344 F. Supp. 2d 971 (E.D. Tex. 2004), three crane riggers filed suit based on racial discrimination because they were required to take a drug test following an accident involving a crane. The plaintiffs were African-American. While using the crane to remove safety valves from a structure, the crane tipped forward, and its left-front outrigger penetrated a concrete surface. Exxon Mobil’s investigation of the incident determined the cause of the accident to be human error—namely that the plaintiffs had not stabilized the crane as required. As such, the three employees submitted to mandatory drug tests and counseling. The plaintiffs suggested an alternate theory for the cause of the accident negating human error. Thus, they argued, they should not have been subjected to drug testing or counseling.
In attempting to right the crane, Exxon Mobil hired an outside contractor. Those employees all were Caucasian, and were assisted by Exxon Mobil employees who were both African-American and Caucasian. That attempt went awry as well, causing substantial damage. Exxon Mobil’s initial investigation did not reveal human error, so no mandatory drug tests were ordered. A subsequent investigation attributed the accident to human error. Thus, plaintiffs argued, in light of the second accident and investigation, the only reason they had to submit to drug testing was because of their race.
In affirming the grant of summary judgment, the court held that a requirement of a drug test, pursuant to an established company policy, is not an adverse action for which a plaintiff may state a claim of discrimination, and the plaintiffs failed to prove discrimination by evidence that they were treated differently from employees involved in a second accident because the two accidents were not “nearly identical.” In determining whether the accidents were “nearly identical,” the court focused on the fact that the contractor was in control of the equipment in the second accident, and that several individuals involved in the second accident were of the same race as the plaintiffs.
IV. Texas Supreme Court Cases
A. Intentional infliction of emotional distress is a “gap-filler” tort never intended to supplant the existing remedies under the Texas Commission on Human Rights Act.
In Hoffmann-La Roche, Inc. v. Zeltwanger, the Texas Supreme Court held that, when the gravamen of the plaintiff’s complaint is for sexual harassment, the plaintiff must proceed solely under a statutory discrimination claim unless there are additional facts, unrelated to the sexual harassment, to support an independent tort claim for intentional infliction of emotional distress. 144 S.W.3d 438, 441 (Tex. 2004). Joan Zeltwanger brought suit against her former employer, Hoffman-La Roche, for sexual harassment under Section 21.051 of the Texas Labor Code, retaliation under Section 21.055 of the Texas Labor Code, and intentional infliction of emotional distress. Id. at 441-42.
After prevailing at trial against La Roche, the jury awarded Zeltwanger $853,963 for front and back pay, $500,000 in compensatory damages, and an additional $8,000,000 in punitive damages for her sexual harassment claim. Id. at 442. On the intentional infliction of emotional distress claim against La Roche, the jury awarded $1,000,000 for mental anguish, $73,000 for past and future medical care, and another $8,000,000 in punitive damages. Id. Realizing the potential for double recovery and even more than likely realizing the statutory cap on compensatory damages for harassment claims, Zeltwanger moved to limit her damages under the harassment claim to front and back pay and attorney’s fees while taking her mental anguish damages and punitive damages under her intentional infliction of emotional distress claim. Id. On appeal, the court concluded that Zeltwanger could recover front and back pay and attorney’s fees under her harassment claim as well as mental anguish damages and punitive damages under her intentional infliction of emotional distress claim. Id. at 441. La Roche appealed this decision to the Texas Supreme Court.
The Texas Commission on Human Rights Act (“TCHRA”) prohibits an employer from discriminating against an individual because of race, color, disability, religion, sex, national origin, or race. See Tex. Labor Code Ann. § 21.051. Sexual harassment is one form of prohibited employment discrimination. Zeltwanger, 144 S.W.3d at 445 (citing Meritor Sav. Bank, FSB v. Vinson, 477 U.S. 57, 64 (1986); Eward v. Wornick Family Foods, Corp., 878 S.W.2d 653, 658 (Tex. App.—Corpus Christi 1994, writ denied)). In Zeltwanger, the Texas Supreme Court recognized that, when creating causes of action for discrimination, including sexual harassment, the Texas Legislature specified the types and amounts of damages to be awarded under the TCHRA. Id. at 446. The TCHRA provides that a court may award compensatory damages upon finding that an employer has engaged in an unlawful intentional employment practice and may further award punitive damages when the discriminatory practice is with malice or reckless indifference. See Tex. Labor Code Ann. § 21.2585(a), (b). However, the Act also places a cap on compensatory and punitive damages based on a sliding scale proportionate with the size of the employer. See Tex. Labor Code Ann. § 21.2585(d). The largest employers are subject to maximum cap of $300,000 for certain compensatory damages and punitive damages. Id. The compensatory damages that are capped include, among other things, “emotional pain, suffering, inconvenience, mental anguish, loss of enjoyment of live, and other non pecuniary losses.” Id. Zeltwanger attempted to circumvent this cap by electing to take her mental anguish and punitive damages under the intentional infliction of emotional distress cause of action.
The Texas Supreme Court held that intentional infliction of emotional distress “should not be extended to thwart legislative limitations on statutory claims for mental anguish and punitive damages.” Zeltwanger, 144 S.W.3d at 447. The Court reiterated its previous holding that intentional infliction of emotional distress is a “gap-filler” tort, “judicially created for the limited purpose of allowing recovery in those rare instances in which a defendant intentionally inflicts severe emotional distress in a manner so unusual that the victim has no other recognized theory of redress.” Id. (citing Standard Fruit and Vegetable Co. v. Johnson, 985 S.W.2d, 68 (Tex. 1998)). The Court further explained:
The tort’s “clear purpose,” we noted, was “to supplement existing forms of recovery by providing a cause of action for egregious conduct” that might otherwise go unremedied. We cautioned, however, that the tort was “a ‘gap-filler’ tort that should not be extended to circumvent the limitations placed on the recovery of mental anguish damages under more established tort doctrines. Likewise, in this case, the tort should not be extended to thwart legislative limitations on statutory claims for mental anguish and punitive damages.
See id. Where the gravamen of a plaintiff’s complaint is really another tort, intentional infliction of emotional distress should not be available. Id. It does not matter whether the plaintiff actually brings a cause of action under the other tort. See id. at 448. He or she is still precluded from bringing a cause of action for intentional infliction of emotional distress. See id.
Zeltwanger also attempted to argue that she still had a viable intentional infliction of emotional distress claim because of independent grounds, apart from sexual harassment. See id. at 448-49. However, the Court found that, even assuming that some or all of the La Roche’s conduct was “independent” of Zeltwanger’s sexual harassment claims, the conduct did not rise to the level of extreme or outrageous conduct. Id. In the end, the Court reversed the judgment of the appellate court and remanded the case to the trial court for it to render judgment for the appropriate damages under Zeltwanger’s sexual harassment claim rather than her intentional infliction of emotional distress claim. Id. at 450.
The Texas Supreme Court recently reaffirmed the “gap-filler” approach and expressed its impatience with intentional infliction of emotional distress claims. See Creditwatch, Inc. v. Jackson, 157 S.W.3d 814, (Tex. 2005) (“For the tenth time in little more than six years, we must reverse an intentional infliction of emotional distress claim for failing to meet the exacting requirements of that tort”).
B. Texas counties are not entitled to Eleventh Amendment immunity from federal claims brought against the county in state court.
In Hoff v. Nueces County, current and former employees of Nueces County Sheriff’s Department filed suit against Nueces County in state district court alleging violations of the Fair Labor Standards Act (“FLSA”), 29 U.S.C. §§ 201-09. See 153 S.W.3d 45, 47 (Tex. 2004). Specifically, the employees claimed that, among other things, Nueces County violated the FLSA by failing to pay the employees for time worked, by failing to properly compute overtime wages, and by not allowing the employees to take sick or vacation leave. Id. Nueces County filed a plea to the jurisdiction claiming that Nueces County possessed Eleventh Amendment immunity under the United States Constitution. Id. The district court denied the plea; however, on interlocutory appeal, the appellate court found that Nueces County was immune from suit under the Eleventh Amendment. Id. The Texas Supreme Court disagreed. See id. at 49-50.
The Court first recognized two aspects of Eleventh Amendment jurisprudence that are well settled: (1) federal courts have no jurisdiction over federal or state law claims against a state or state agency unless Eleventh Amendment immunity has been expressly waived by the state or abrogated by Congress; and (2) Eleventh Amendment immunity protects non-consenting states from being sued in their own courts under federal law. Id. at 48 (citing Seminole Tribe of Fla. v. Fla., 517 U.S. 44, 59 (1996); Alden v. Maine, 527 U.S. 706, 754 (1999)). However, the Court held that a county is not an arm of the State of Texas for Eleventh Amendment immunity purposes. Id. at 49. While a county may be considered an arm of the state under Texas law, federal law controls the treatment of a county for Eleventh Amendment purposes. Id. Under federal law, “the U.S. Supreme Court has consistently held that neither counties nor cities are arms of the state entitled to Eleventh Amendment immunity.” Id.
Eleventh Amendment immunity extends to state entities that are viewed as arms of the state in order “to protect the state treasury from liability that would have had essentially the same practical consequences as a judgment against the State itself.” Id. (quoting Lake County Estates, Inc. v. Tahoe Reg’l Planning Agency, 440 U.S. 391, 400-01 (1979)). When determining whether a state agency is an arm of the state, the United States Supreme Court considers the law of the state to determine that nature of the public entity seeking immunity. Id. The Supreme Court has held that, when a county is designated as a “body corporate and politic” that can levy taxes to pay judgments against it, issue bonds payable from county taxes, sell property, and contract for the construction or repairs of structures, there sufficient indicia of independence to make it distinct from the state for Eleventh Amendment purposes. Id. (citing Moor v. County of Almeda, 411 U.S. 693, 719 (1973)). Under Texas law, a county is a “corporate and political body” that may levy taxes to pay for its debts, sell or lease real property, and issue bonds to provide for its funding. See Tex. Loc. Gov’t Code Ann. §§ 71.001, 71.031, 263.001, 293.051.
The Court held that “Texas counties, authorized to exercise the aforementioned powers, possess sufficient indicia of independence that they are not arms of the state for purposes of the Eleventh Amendment. Id. at 50.
C. Texas Supreme Court refused to toll the statute of limitation due to misidentification in a worker’s compensation case without meeting the “similar trade name” requirement.
In Flour Bluff Independent School District v. Bass, Margaret Bass filed a worker’s compensation claim after slipping and injuring her back while employed by Flour Bluff Independent School District (“Flour Bluff”). 133 S.W.3d 272, 273 (Tex. 2004) (per curiam). The Texas Association of School Boards (“TASB”) denied Bass’ claim for compensation and Bass appealed the denial to the Texas Worker’s Compensation Commission Appeals Panel, which denied the benefits. See id.
On the day before the statute of limitation expired, Bass filed a judicial petition for review of the Panel’s decision and named TASB as the defendant. Id. However, TASB was merely the third party administrator of the workers’ compensation benefits, and thus, not a proper party. Id. Over a year after the statute of limitations expired, Bass amended her petition and named FBISD as a defendant. Id. Flour Bluff filed a motion for summary judgment on its affirmative defense of statute of limitations, and the trial court granted the motion. Id.
On appeal, the court reversed the summary judgment finding that there was a fact issue as to whether the statute of limitation was tolled due to Bass mistakenly identifying TASB. Id. at 274. The appeals court held that misidentification tolls the statute of limitations in a worker’s compensation appeal if the appealing party established that the proper defendant was aware of the facts of the lawsuit and was not misled or placed at a disadvantage by the appealing party’s error. Id. However, the Texas Supreme Court disagreed. Id. The Court stated that “[t]he statute of limitations will be tolled in misidentification cases if there are two separate, but related, entities that used a similar trade name and the correct entity had notice of the suit and was not misled or disadvantaged by the mistake.” Id. (emphasis added). TASB and Flour Bluff did not operate under a similar trade name. Id. Thus, the statute of limitation could not be tolled under the misidentification theory. The Court refused to ignore the “similar trade name” requirement in a workers compensation case.
V. Texas Court of Appeal Cases
A. In a wrongful termination case, a trial court abused its discretion by allowing discovery of information regarding other employees who were not “similarly situated” to the plaintiff.
Lorrilisa Ramirez filed suit against her employer, Greyhound Lines, and her supervisor for wrongful termination and discrimination. See In Re Greyhound Lines, Inc., 138 S.W.3d 19, 20-21 (Tex. App.—San Antonio 2004, no pet.). Ramirez filed interrogatories and requests for production on the defendants requesting, among other things, information regarding “the Texas offices for a period of five years prior to the Plaintiff’s termination.” Id. at 22. The defendants objected to the scope of Ramirez’s discovery requests, and Ramirez filed a motion to compel. See id. The trial court allowed Ramirez to conduct discovery under this broad scope; and therefore, and the defendants filed a writ of mandamus. Id. at 21.
The court of appeals held that, in employment claims, the type of claim determines the scope of discovery allowed. Id. The court recognized
Courts distinguish between an individual’s claim against a company for acts committed against that individual and company-wide claims that a company has a pattern or practice of discrimination against a particular classification of employees. In a claim for individual acts of discrimination, the plaintiff is not necessarily entitled to information about other employees, unless those other employees are ‘similarly situated.’
Id. at 21-22. The court determined that Ramirez was not alleging a company-wide policy of discrimination, and therefore, her discovery should have been limited to the Greyhound terminal where she worked and to employees that were similarly situated. Id. at 22. However, the court further stated that Ramirez should not be limited to information for the time period in which she worked. Id. Because her supervisor’s actions were at issue, Ramirez could review records related to her supervisor’s conduct prior to Ramirez’s employment. Id. In conclusion, the court held that the trial court abused its discretion by allowing discovery of information regarding persons who were not “similarly situated” to Ramirez. Id. at 23.
B. The statutory employer/employee relationship extends throughout all tiers of subcontractors and their employees when the general contractor purchases worker’s compensation insurance that covers all of the workers on the site.
In Etie v. Walsh & Albert Co., Ltd., Clark Construction was contracted by Enron, the owner, for the construction of Enron Building No. 2. See 135 S.W.3d 764, 765 (Tex. App.—Houston [1st Dist.] 2004, pet. denied). Clark Construction then subcontracted a part of the work to Way Engineering. Id. In turn, Way entered into a lower level subcontract with Walsh & Albert Co., Ltd. to perform the sheet metal work for the building. Id. Pursuant to an option in its contract with Way, Clark Construction purchased a single worker’s compensation insurance policy from Traveler’ Property & Casualty Group to cover all subcontractors and employees who worked on the Enron Building No. 2 site. Id. Sheldon Etie, an employee of Way, was seriously injured on site when a plenum, improperly attached to the ceiling by a Walsh & Albert employee, fell and struck him. Id. at 765-66. Etie recovered worker’s compensation benefits and filed a third-party negligence suit against Walsh & Albert. Id. at 766. Walsh & Albert filed a traditional motion for summary judgment on the basis that it is immune from suit due to the worker’s compensation policy, and the trial court granted the motion. Id.
Etie appealed claiming that Walsh & Albert was not covered by the worker’s compensation policy purchased by Clark Construction. Id. On appeal, the court recognized that the Worker’s Compensation Act authorizes a contractor to provide worker’s compensation insurance coverage for subcontractors and the subcontractor’s employees. Id. (citing Tex. Labor Code Ann. § 406.123(a) (Vernon Supp. 2004)). However, the Act is silent as to “lower tiers” of subcontractors and whether their employees are statutory employees of the general contractor. See id. Etie argued that Walsh & Albert was an independent contractor, and therefore, Walsh & Albert was not a statutory employee. Id.at 767. Thus, Walsh & Albert should not be immune from suit. Id. While the court admitted that Walsh & Albert was most likely an independent contractor in the traditional sense, Walsh & Albert was still an employee under the Act.
The court held that “the provision of worker’s compensation insurance transforms an independent contractor into a ‘deemed employee.'” Id. The court pointed out that, under the Act, Way was both a subcontractor for Clark and a general contractor for Walsh & Albert. Id. Clark’s contract with Way provided insurance to all worker’s affiliated with Way at the site. Id. In turn, Way’s contract with Walsh & Albert incorporated by reference all the provisions of the contract between Clark and Way. Id. As a result, Walsh & Albert’s employees were also covered under Clark’s worker’s compensation insurance policy. Id. (citing Tex. Labor Code Ann. § 406123(e)). Accordingly, the court held:
[T]he Act’s deemed employer/employee relationship extends throughout all tiers of subcontractors when the general contractor has purchased workers’ compensation insurance